Vehicle Lifecycle Costs Analysis

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www.fleet.toyota.com

Automotive Fleet, 2003

TABLE OF CONTENTS
PAGE

Optimizing Your Replacement Policy- Direct vs. Indirect Costs3 Vehicle Replacement: How Long Is Too Long?..6 Understanding Your Fleet Costs.10 How Fleet Managers Use Innovation To Cut Costs For Their Companies...15 Smurfit-Stone Formalizes Fleet Expense Review Process.23

The Effective Management Of Net Depreciation Expense.26

Automotive Fleet, 2003

Optimizing Your Replacement Policy- Direct vs. Indirect Costs

Depreciation and maintenance are two direct costs that should be considered when deciding when to replace a vehicle. Indirect costs such as perk value, corporate image, and downtime should also be considered. One of the most debated issues among fleet managers and leasing companies is when to sell a unit to maximize returns and minimize lifecycle costs. To perform a thoughtful analysis of this issue, it is important to consider all direct (hard) costs, including depreciation and maintenance, as well as indirect (soft) costs, including perk value, corporate image, downtime, and feature upgrades. Depreciation, a direct cost, is the largest single controllable expense of running a fleet and can be easily tracked over the lifecycle of a vehicle. Vehicles depreciate heavily in the first couple of years, and more slowly as the vehicle ages. See the green area on the Lifecycle Costs graph, which represents depreciation cost-per-mile for atypical fleet sedan, illustrating the high depreciation in the first two years.

Direct Costs Depreciation Maintenance

Indirect Costs Perk Value Corporate Image Downtime Feature Upgrades

Depreciation comprises two components: utility and prestige value. The utility component (the usefulness of the vehicle) is based entirely on mileage a vehicle loses utility value with every mile driven. The other component, new-vehicle prestige, drops dramatically at delivery the proverbial 30-percent loss going over the curb. Prestige value continues to drop quickly throughout the first two years, and by years four and five virtually no prestige value remains. For the balance of the vehicle life, depreciation is based solely on the amount of utility left in the vehicle. Maintenance, another direct cost, has become somewhat easier to anticipate. Improved reliability and durability have greatly reduced the occurrence of major mechanical failures below 100,000 miles. The blue area of the Lifecycle Costs graph on the page below, which represents maintenance cost-per-mile, illustrates this. Please note that the dramatic increase in maintenance cost at about 140,000 miles is a result of a major mechanical breakdown.

Automotive Fleet, 2003

This graph represents cost-per-mile in cents for depreciation and maintenance of a typical fleet sedan averaging 20,000 miles per year. Use this chart to help figure out the optimum replacement interval. For example, replacing vehicles at 60,000 miles means four replacement vehicles in a 12-year period. Fleets replaced on this schedule will incur the higher first-year costs four times and will not take advantage of the lower fourth-year costs (60,000-80,000 miles) at all. Replacing vehicles at 80,000 miles means three replacement vehicles in the same 12-year period. Fleets replaced on this schedule will incur the higher first-year costs only three times, and will take advantage of the lower fourth-year costs three times. Clearly, it is not financially prudent to operate extremely high-mileage vehicles because the maintenance costs eventually exceed the cost of a new vehicle. Excluding indirect costs, the best time to sell a unit is just before a major breakdown; however, the challenge lies in pinpointing when it will occur. To avoid major maintenance expense, it is recommended that passenger vehicles be replaced at a maximum of about 120,000 miles.
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However, when indirect costs are examined and weighed, lower replacement mileages can be rationalized. Indirect costs to factor in are: Perk value: Extending the replacement life of a vehicle can negatively impact actual or perceived driver benefits, whereas a shorter replacement cycle can enhance them. Corporate image: Fleet operators may choose to replace their vehicles well before 100,000 miles to maintain a younger, cleaner fleet that projects a desired image. Downtime: Lost opportunities and rental costs incurred when drivers must await repairs on aging vehicles are important factors to consider. Feature upgrades: Extending the replacement life of a vehicle can delay the implementation of new features, including safety features such as side airbags and tirepressure indicators or convenience features such as upgraded sound systems. There is no magic formula for deciding when to replace fleet vehicles, but a careful and thoughtful analysis of both the direct and indirect costs will yield the best policy for your fleet. Written By: Peter Klopchic is vice president, vehicle remarketing, for CitiCapital Fleet in Carrollton, TX.

Automotive Fleet, 2003

Vehicle Replacement: How Long Is Too Long?

Knowing in advance exactly when to replace a vehicle is sort of like knowing when to bail out of your favorite stock or commodity: its an indefinable, unpredictable guess. Is there a formula that calculates in advance when its no longer cost-effective to keep a company vehicle in service? No. Can you, however, collect enough data to make an educated, well-informed decision to develop a standard replacement cycle for your company vehicles? Yes! In addition, by developing a comprehensive replacement program, you can make a significant contribution to your companys bottom-line profit. Depreciation is the Single Most Important Factor First, consider the following four characteristics of the replacement decision: Depreciation is the single-most important and significant factor for achieving the lowest possible cost. Simply put, depreciation costs decline faster than other costs increase. What is depreciation? It is the vehicle acquisition cost minus its resale value plus any cost associated with resale. For example: $20,000 vehicle acquisition cost -$8,000 resale value +$300 sales fee =$12,300 depreciation. Three significant factors affect depreciation: 1) acquisition cost, 2) replacement timing, and 3) mileage. Costs To Consider 1. Acquisition 2. Resale Value 3. Resale Fees 4. Interest 5. Fuel 6. Maintenance and Repairs 7. Insurance 8. Title and License Guess Factor Future unknown, unpredictable used vehicle market, high impact Future unknown, somewhat predictable, less impact Future unknown, somewhat predictable, less impact Future unknown, somewhat predictable, high impact

Maintenance: the Second-Largest Vehicle Cost Maintenance directly affects reliability, which can conceal significant hidden or soft costs: downtime, lost time, lost business, lost sales, diminished productivity, plus hard costs such as repair and car rental expenses. Vehicle condition affects resale value, which in turn affects depreciation. Monitoring the condition of vehicles through written condition reports, vehicle inspections, and increased driver responsibility will help improve the vehicle condition and resale value results. Consider requiring two signatures on the condition report, both the driver and the supervisor. Review condition reports at least twice a year. Use the odometer reading to update your records and monitor the vehicle for replacement.
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Consider non-financial, non-qualitative factors like company image, employee morale, employee retention, and safety as part of a replacement decision. These factors often produce a soft return on investment, but can have a dramatic impact on your overall operations. In todays tight labor market, employee retention, morale and attracting new employees with newer, more comfortable vehicles is not uncommon. Some companies even spec trucks with more luxury features like cruise control and upgraded radios in an attempt to lure drivers in a market that is under-populated with qualified truck drivers. To determine your optimum replacement schedule, consider the pros and cons of extending vehicle life along with the vehicle costs. Then follow these seven steps: Step 1: Consider all costs and predict unknown factors. Step 2: Study costs over several actual cycles to determine your best replacement standard. Look at three or more cycles to get a feel for the variations and fluctuations. Base your policy on specific business requirements after weighing the pros and cons of extending vehicle life. Step 3: Establish two replacement cycles. It is typically impractical to replace all vehicles in the short eight-week fall market (best market). Establish a second cycle for the spring market (second best market). In order to take advantage of the best markets, you must order the replacement vehicle in time for delivery in the fall or spring. Therefore, plan in advance so vehicles are ordered with enough delivery time. If manufacturers pricing is not yet released, as is common in the pre-model year introduction months, estimate new-vehicle pricing by adding the current inflation rate to the most recently published manufacturers prices. VEHICLE DISPOSAL BY MONTHS October 22.7% March 8.6% November 12.9% August 4.9% September 11.0% December 3.7% May 10.4% February 2.5% April 9.8% July 2.5% June 9.8% January 1.2%

Step 4: Become familiar enough with operating costs to spot the lemons so you can replace them before major component failure. Typically, repair costs are not fully recovered when selling the vehicle. Therefore, in the event of a major component failure, consider selling the vehicle as is or repair and extend replacement. Step 5: Remain flexible to react to changes in the used-vehicle market or other economic conditions. A replacement standard is not an absolute. Allow flexibility and base decisions on professional management judgment rather than strictly policy. Step 6: The time vehicles remain in service impacts resale, operating expense, and vehicle reliability. Extending vehicle life increases the importance of having a solid preventive maintenance program. Avoid risks associated with downtime by maintaining safe and reliable vehicles. Follow the maintenance guidelines in the auto manufacturers manuals. Pay special attention to the guidelines for severe duty use and implement a more frequent preventive maintenance schedule for vehicles that operate under severe conditions.

Automotive Fleet, 2003

Replacement Timing
Acquisition Cost Negotiate the best deal for the best vehicle to perform the intended function in the safest manner possible. The first six to eight weeks of a new model-year are the Strongest Market strongest resale market. The market is adjusting to the fact Sept. 15 Nov. 15 that all cars are one model year older. This market Fall deteriorates quickly as more used cars saturate the resale market. Weakest Market Nov. 15 Feb. 15 Winter Replacement Timing 2nd Strongest Market Feb. 15 June 15 Spring 2nd Weakest Market July 15 Feb. 15 Summer This longer market is good for sales to individuals and for sales of light-duty trucks (vans, sport/utility vehicles, pickups). Sell all vehicles that were not ready for replacement in the fall. The summer market is too close to the new model-year and build-out of the old models. If you must replace a vehicle, consider renting a short-term vehicle and order the new vehicle in the fall. You will avoid putting a new vehicle in service that is already almost one year old. The winter months typically bring the used-car market to its lowest point. Avoid winter sales as much as possible.

Mileage

Generally, figure that manufacturers build vehicle components with a life of at least 100,000 miles. Expect minor component replacement at 50,000 to 60,000 miles.

Step 7: Do not forget those significant hidden or soft costs caused by downtime. Consider lost time, lost business, lost sales, and diminished productivity while the vehicle is in the repair facility. Although difficult to estimate, these costs are undoubtedly significant. Studies show the typical value of a sales or service employee to be valued at a minimum of $50 per hour. Some industries, such as pharmaceuticals, value sales representatives time at $150 per hour. Corporations and government agencies with large vehicle fleets generally base the replacement decision on time and accumulated mileage. Statistics show a tendency to keep light- ,medium- , and heavy-duty trucks in service for longer periods than light-duty cars. The majority of these companies and government agencies report that they sold most of their vehicles in the best markets fall, followed by the spring. There is no straightforward, simple formula to determine the correct replacement policy for company vehicles. Historical data tells us that by replacing vehicles in the fall and spring, companies can dramatically reduce depreciation expense. Establishing two replacement cycles will bring order to the process and save administrative time.

Automotive Fleet, 2003

Extending Vehicle Life Advantages 1. Reduces depreciation. 2. Lower taxes and license fees. 3. Lower collision repair costs.

Disadvantages
1. Higher maintenance costs. 2. Diminished productivity downtime. 3. Older vehicle technology, higher fuel costs. 4. Lower employee morale. 5. Safety risks associated with vehicle breakdown, parts failures, and older technology. 6. Values decline at a faster pace during weak used-vehicle market conditions. An analysis of your past replacement cycles and costs weighed against those non-financial, non-qualitative factors and your companys unique requirements should provide a clear indication of the most appropriate months-in-service and miles-in-service for your company vehicles. A flexible replacement policy will allow you to adapt to changing conditions in both the used-vehicle market and manufacturers new model year availability. (1) The National Association of Fleet Administrators (NAFA) offers an excellent Microsoft Excel spreadsheet called Lifecycle Cost Analysis Optimum Replacement. The model includes a 10-year analysis of user-input fixed and operating vehicle costs and includes considerations such as return on investment and downtime. While designed for companies with large fleets of vehicles, the model provides insight into the replacement decision process. Contact NAFA at (732)494-8100 or ww.nafa.org. Written By: Janis Christensen, CAFM

Automotive Fleet, 2003

Understanding Your Fleet Costs

If you want your fleet manager to minimize the negative effects of budget-balancing initiatives on both the quality of the services the fleet provides to its customers in the near term, and the viability of fleet operations in the long term, it is imperative that they proactively participate in cost-cutting decisions. This requires that they understand their costs; that they understand how decision makers in their organizations understand or misunderstand their costs; and that they pursue savings in a way that satisfies shortterm fiscal objectives without undermining the long-term economic health of the fleet operations they manage. Types of Costs The costs of owning and operating a fleet can be characterized in many different ways: capital and operating costs; fixed and variable costs; direct and indirect costs; avoidable and unavoidable costs; pecuniary and non pecuniary costs; average and marginal costs; current and future costs; fiscal and economic costs. The distinctions between these terms are not merely semantic; management and customer attitudes toward, and decisions regarding the management of, these costs can have a profound impact on a fleet organization. For example, it is not uncommon in government jurisdictions and some private companies for large sometimes unreasonably large amounts of general overhead (i.e., indirect) costs to be distributed to the fleet management organizations budget through a cost allocation plan. Overhead cost allocations equaling 25 percent of a fleets annual operating budget are not unheard of. Insofar as the fleet organization must recover the costs of its services from its customers (via a charge-back system or cost clearing account), such allocations increase the amounts that it must charge for these services. High user charges often invite comparisons by both customers and management decision makers between in house and commercial (e.g., local vendor) billing rates and charges. Sometimes, such comparisons lead to calls for the outsourcing of fleet maintenance functions because the in-house service provider is deemed to be uncompetitive with commercial or contract service providers. The potential fallacy of such conclusions is that the in-house service provider may be quite competitive if indirect overhead costs are factored out of any billing rate comparisons. But why would anyone want to do this? After all, contractors and commercial enterprises have overhead costs too and they dont get to exclude them from their billing rates if they want to stay in business, that is. The difference is that the indirect costs allocated to an inhouse fleet organization may not be avoidable to the larger company or jurisdiction of which it is a part. In other words, the legal, financial, purchasing, risk management, human resources management, and other overhead costs currently allocated to the fleet organization often do not diminish at all even if all fleet management functions are outsourced. Consequently, assessments of the competitiveness of in-house fleet management functions that are based on comparisons of billing rates or unit costs must recognize that some portion of the in-house rates or costs usually is neither avoidable by the larger enterprise nor within the ability of the fleet management organization to control. Decisions by both fleet users and management decision makers that are based on erroneous conclusions about the costs and cost competitiveness of the in-house organization can actually increase fleet costs.
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This is but one example of why it is important for your fleet manager to understand the many different ways in which cost information can be shaped, interpreted, used, and misused. The uses to which such information are put are as varied as the objectives of the stakeholders and decision makers in an organization. Budget analysts, for instance, usually have a short term one-to-two-year focus and are interested in the fiscal rather than the economic consequences of decisions. The fact that cutting fleet replacement costs today will add to an increasingly unmanageable backlog of replacement costs in the future may be of no consequence to them. Similarly, they may be unmoved by the fact that reducing pecuniary or out-of-pocket replacement costs can increase non-pecuniary costs associated with deteriorating fleet safety, availability, reliability, and technological currency/capability. Indeed, these often are referred to, dismissively, as soft costs because they are difficult to quantify. Few individuals would argue, however, that they replace their personal cars in order to achieve immediate, hard cost savings. Rather, most of us bite the bullet and buy a new car because the non-pecuniary costs of an old, unreliable vehicle have become unacceptably high. The fact that they are difficult to quantify does not mean that they are not real to us. While budget makers may understand conceptually that fleet operating costs eventually will go up if vehicles are not replaced in a timely manner, their immediate concern is to balance the budget. Consequently, it is unrealistic to expect them to make decisions based on considerations such as minimization of vehicle lifecycle costs; this is a worthy economic goal for all fleet operations, but not always a fiscally attainable one. Cost-Cutting Goals Ultimately, the importance of different kinds of fleet costs is a function of an organizations fiscal and economic goals which, notwithstanding the above example, need not always conflict with one another. In order to be effective over the long term, your fleet manager generally must tailor his or her actions to immediate organizational imperatives such as cutting costs in some years and making investments in others while also promoting policies and practices that maximize the ongoing cost effectiveness of the fleet such as replacing vehicles and equipment in accordance with sound lifecycle guidelines. That is, your fleet manager must be prepared to pursue two different types of cost-cutting goals: cost deferral and cost elimination. Cost Deferral In tough economic times, long term cost-effectiveness goals generally take a back seat to short-term budget balancing goals. In an ideal world, fleet costs and performance levels are optimized, depoliticized, and, therefore, largely unscrutinized by budget cutters, even in tough times. However, even the best-run fleets find it difficult to avoid the budget axe all the time. Perhaps the most painless way (in the short term) to cut fleet costs is to move them to future fiscal years that is, to defer them. Reducing or suspending replacement expenditures is a strategy for cutting costs that frequently is used by organizations that finance their vehicle acquisitions with cash. Under this financing approach, every dollar not spent on replacement purchases is a dollar saved or freed up for other uses. Under other financing approaches such as leasing or lease purchasing, the ability to avoid costs by not replacing vehicles is limited because only a portion of the capital costs of newly acquired vehicles are paid in the year in
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which the assets are delivered (with the balance being paid in future years). Depending on the age and condition of the fleet, deferring replacement purchases for a year or so may have little effect on overall fleet costs or performance levels. If the fleet already is in poor shape, however, suspending replacement purchases can translate into immediate increases in maintenance and repair, mileage reimbursement, and other operating costs as well as future increases in replacement costs and reductions in residual values. Other fleet costs that may be deferred include discretionary expenditures on things such as a new information system or a new maintenance facility. The operational impacts of such delays usually are negligible. Expenditures on things such as mechanic training also may be deferred temporarily without serious consequences. While it theoretically is possible to defer some vehicle maintenance, rehabilitation, or repair activities to a future year, the immediate budget savings that can be achieved by doing so usually are small. In the case of light-duty vehicles whose maintenance is outsourced, these costs are relatively minor to begin with. In the case of fleets maintained in house, the majority of these costs are unavoidable because they result from the salaries of mechanics who are unlikely to be laid off except in the most dire circumstances. Cost Elimination Achieving true cost savings involves more than just putting off certain expenditures in the hope that an organizations fiscal situation will improve in the future; it requires eliminating costs. Fundamentally, there are only two ways to do this: by providing a lower level of service to fleet users, or by providing existing services more efficiently and economically. Over time, most organizations increase their cost effectiveness which can be defined as the quality of service they can provide at a given cost through a combination of these two types of strategies. For example, fleet costs can be reduced by removing under-utilized vehicles from the fleet and requiring the users of those vehicles to meet their mobility needs in other ways: by sharing a fleet vehicle with other employees; by renting a vehicle from an in-house motor pool (or a commercial provider) on an as-needed basis; by using an employee shuttle or public transportation; or by driving their personal vehicles and being reimbursed for such use. The first three of these tactics involve a clear reduction in the level of service enjoyed by the individuals who lose their employer-provided vehicle. The third tactic may or may not result in greater inconvenience to employees depending on factors such as whether or not they currently take a fleet vehicle home at night and whether they have a personal vehicle that is available to them and suitable for business use. Other examples of service cutbacks that have the potential to reduce a fleet management organizations costs (depending on the extent to which these costs are avoidable) include eliminating call center services and requiring employees to work with commercial maintenance and repair vendors themselves; shutting down a motor pool operation; cutting back on maintenance facility hours of operation; curtailing after hours, emergency, and roadside repair services; and abolishing accident investigation and operator training programs.

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It is important to realize that these types of maneuvers reduce fleet organization operation costs primarily by shifting responsibilities and their associated costs to fleet users and other individuals within an organization. It is critical that decision-makers understand that service reductions not only do not necessarily reduce the parent organizations costs, but may actually increase them. Indeed, it is easy to be penny-wise and pound foolish by tampering with service levels in the search for quick budget reductions. A classic example of this is substituting the use of quick lube-type outlets for an in-house preventive maintenance program. This is something that often is proposed in the belief that allowing employees to obtain service for their vehicles at widely and conveniently available retail outlets will save them both time and money. The flaw in such proposals is that a quick lube service rarely is equivalent to a bona fide PM service and, even if it were, any mechanical defects uncovered during such a service could not be remedied by the quick lube outlet. Thus, a strategy that ostensibly will save you money and your employees time may necessitate multiple trips to multiple service providers where a single trip sufficed in the past. The cost of this strategy clearly falls on the vehicle operators, the reduced productivity of which may result in higher out-of-pocket and opportunity costs to the employer than were incurred by performing PM services in-house. As this example illustrates, reducing fleet costs by cutting services should not be pursued in a vacuum. Proper consideration must be given to the role of fleet management services in optimizing employee mobility and productivity. The other, and ultimately the best, way to eliminate fleet costs is to provide services more economically and efficiently. This means reducing the costs of the inputs to a fleet operation, whether they be vehicles and equipment, employee labor, materials and supplies, fuel, contractual services, or facilities. Some of these inputs come from in house personnel both within the fleet management organization and other divisions or agencies such as purchasing, accounting, legal, risk management, and so forth. Others, such as vehicles, parts, and fuel, are furnished by third-parties. Eliminating (as opposed to deferring or shifting responsibility for) significant amounts of fleet costs usually cannot be done quickly. This is because many of these costs are fixed and thus unavoidable in the short term. For instance, the prices of many of the commodities and thirdparty services used by fleets things such as repair parts, fuel, specialty repair services, and fleet leasing and management services are dictated by contracts of at least a years duration. Expenditures may be able to be reduced quickly by curtailing the consumption of these goods and services, but not by reducing their raw costs. In-house labor costs are notoriously difficult to cut quickly for several reasons. First, changes in work methods that can significantly increase employee efficiency and productivity and therefore have the potential to reduce staffing requirements are time-consuming to design and implement. The same is true of most new outsourcing initiatives. Second, it often is politically and/or contractually difficult to eliminate staff except through attrition. Third, good employees are hard to find, so it usually makes more sense to redeploy staff who have been relieved of certain duties as a result of business process reengineering rather than to simply

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lay them off. Thus, while the cost of a certain fleet management activity may be reduced through such reengineering, the organizations overall salary costs may not change. In short, true cost elimination strategies usually do not produce significant fiscal or economic benefits in the short term. The vast majority of a fleet operations costs is determined by service delivery, business process, staffing, collective bargaining, contracting, and other decisions that simply cannot be undone overnight. This does not mean that fleet managers, budget analysts, and others should not explore these areas for savings opportunities. It does mean that they need to temper their expectations as to how much and how quickly an organization can save on its fleet operation to help close a looming budget deficit. Management directives based on unfounded premises and unrealistic expectations can quickly backfire, damaging fleet customer goodwill and employee morale, and increasing rather than reducing fleet costs. For these reasons, it is imperative that fleet managers proactively participate in all fleet-related cost cutting initiatives. Written By: Paul Lauria is president of Mercury Associates, Inc., a fleet management consulting firm headquartered in Gaithersburg, MD.

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How Fleet Managers Use Innovation To Cut Costs For Their Companies
By occasionally holding over vehicles at closed lease end, FCCI Insurance Group Fleet Administrator Cindi Armstrong lowers her rental expenses, which had averaged $1,200 to $1,400 per vehicle, per month. By shortening the lease term on the cars in the Diebold Inc. fleet, Fleet Manager Linda Taylor finally began to see some resale value on those vehicles. The above two cost-cutting measures may sound simple, but a little innovation can cut fleet costs for your company. Following are some fleet manager innovations and cost-cutting measures that you can use to impress your boss.

Pool Car System Saves Money For FCCI Insurance Fleet

At FCCI Insurance Group in Sarasota, FL, cars are needed for consultants or branch office employees who fly into Sarasota to work at the corporate headquarters in Sarasota for extended periods of time. By working closely with the departments that are bringing in these employees, opportunities are identified to use available pool vehicles instead of renting vehicles. With vehicle rentals averaging $1,200 to $1,400 per month, Armstrong says real savings have been realized. Other times, local fleet drivers or out-of-town fleet drivers, who come into the office for meetings, will ask Armstrong to coordinate service for their assigned vehicle and arrange for the use of a pool car, eliminating the need for a rental. Another cost savings occurs because there is no driver downtime, Armstrong said. When she recently received a request for a two month lease of a pool car and none was available, Armstrong came up with the idea to extend the lease on a closed-end leased vehicle that was due to be turned in to the leasing company. It made sense to hold the leased vehicle over for a few for more months to avoid a potential rental expense of about $2,800, she said. CASE STUDY Before: When an employee from another office at FCCI Insurance came to the headquarters office in Sarasota, FL, the fleet department would rent a car for that employee for about $40 a day. Now: The driver is assigned a pool car. FCCI saves about $1,200 to $1,400 per vehicle, per month. Cindi Armstrong of FCCI Insurance Group said she will occasionally refuse a pool car reservation because none is available, and in that case the driver will be paid 34.5 cents a mile. Armstrong described how she saved money by re-negotiating with the leasing company for an additional year on a vehicle that was at (closed) lease end for a lower monthly lease rate. We needed the use of an additional vehicle for very low-mileage use for one year, she said. We didnt want the expense of a rental, but didnt want to continue to pay the original highmileage lease term on the vehicle we had available, either.
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Armstrong recently cut the number of pool cars in the fleet from eight to six. This cut was based on pool car utilization studies that are used as a guideline for the number of pool cars that are needed. If pool cars are sitting unused in a lot, thats a waste of money. Its better to occasionally pay employees to drive their own cars for a business trip than to have pool cars that arent being fully utilized, she said. The company pays the driver to drive his or her own car at the current IRS-approved rate for business use of a personal car. Another cost-cutting measure Armstrong has initiated is to negotiate the turn-in conditions list for closed-end leases. She says this approach helps reduce the turn-in charges assessed by the appraisers at lease end. At one time, Armstrong said, her fleet was charged $450 for a cigarette burn hole in a seat. The charge was eventually adjusted downward, but new negotiated contracts specifically limit charges for such occurrences. Everything is settled upfront and incorporated into the contract, she said. Replacement Cycle Adjustment Saves Money for Diebold Over the past two model-years, Fleet Manager Linda Taylor had seen the number of Ford Focus vehicles in her fleet at Diebold Inc. in North Canton, OH, grow from about 50 to about 400. The vehicles were on a 50-month lease, but 70,000 to 80,000 miles were being put on the vehicles in 20 months, and the vehicles were turned in early. We were taking about a $5,000 loss on those vehicles because of the early turn-in time, said Taylor, who oversees 3,400 vehicles. Meanwhile, the fleets vans and half-ton trucks were on a 50-month lease but were being turned in at 75,000 miles or roughly 32 months. On the vans and trucks, we were seeing a credit come back on the resale value, Taylor said. What Taylor decided to do sounds simple, but it cut costs for the company. She put the cars on a shorter-term lease and extended the vans to a 55-month lease. Taylor said the move takes advantage of the value of the vehicles. So you may be paying a little more for one set of vehicles and paying less for the other, but it nets out to zero at the end when we go to turn it in, Taylor said. We are taking advantage of our money, rather than taking the hit on some vehicles and gains on the others, were just taking advantage of the loss and gain at the same time. Rather than lose money on our cars, were paying a little more each month. And rather than gaining money on our trucks and vans, were paying less per month. Another cost-cutting measure implemented by Taylor was to outsource two functions to a fleet management company: vehicle ordering and taking of driver phone calls. Its very unique, Taylor said. One of the first things I heard was that the salespeople will still

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CASE STUDY Before: The fleet at Diebold Inc. in North Canton, OH was taking a $5,000 loss on 400 cars because high mileage was being put on the vehicles and they were on a 50-month lease term but being turned in early, said Fleet Manager Linda Taylor. But the fleets trucks and vans were used for 75,000 miles or roughly 32 months, and the fleet saw a credit come back on the resale value. Now: After shortening the lease term on the cars, and extending the lease term on the trucks and vans, the fleet comes out even, resulting in considerable cost savings. call you, so we changed my number so that when they called, it would automatically go to [the fleet management company]. When you do outsourcing, you have to absolutely refuse to take phone calls. I was one person with 3,400 vehicles. A lot of companies still expect you to take phone calls, but I had the support of management. It saved a lot of effort and time. Sometimes we still have to send reminders and let people know they still have to call [the fleet management company]. Another cost-cutting measure Taylor has implemented is to negotiate three-year contracts with vehicle manufacturers. The Diebold fleet is currently on a three-year contract to do exclusive business with Ford Motor Co. Taylor said that by doing exclusive business with Ford, her fleet saves $2.5 million per model-year. Dunn-Edwards Single Sources Manufacturer to Earn Rebate The fleet at Dunn-Edwards Corp. in Los Angeles has historically included vehicles from Ford, DaimlerChrysler, and General Motors. Current vehicles include the Dodge Intrepid, CASE STUDY Before: The fleet at Dunn-Edwards Corp. in Los Angeles historically used Ford, General Motors, and DaimlerChrysler vehicles. Now: Fleet Administrator Dominick Susca is going to one manufacturer, and rebates will save the fleet a substantial amount per vehicle. Dominick Susca of Dunn-Edwards in Los Angeles says going with one manufacturer will save him a substantial amount per vehicle. Dodge Caravan, Pontiac Grand Prix, and Ford F-150. But for 2002, that will probably change drastically, said Dunn-Edwards Fleet Administrator Dominick Susca. When planning his 2002 selector list, Susca called his Ford, Daimler- Chrysler, and GM fleet sales representatives and told them he was going to choose one manufacturer for 2002. All three of the manufacturers have responded to Susca with rebate plans. Although Susca had not chosen one as of press time, he says going with one manufacturer will save him a substantial amount per vehicle. The vehicles are on an open-end lease. I told them Id be buying 50 to 75 vehicles a year, he said. But to go to one manufacturer, I need a rebate, said Susca, who oversees a fleet of about 320 vehicles.

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Crossmark Rents Vehicles Direct From Rental Car Agency Most fleet managers use their fleet management company to book and manage their rental vehicles used when their fleet vehicles need mechanical repairs or are involved in an accident. Eric Rickard, fleet manager for Crossmark in Plano, TX, recently began renting vehicles directly from a major rental car company, which resulted in reduced overall car rental expense. I essentially cut out the middleman, Rickard said. He said that in addition to saving money on the rental rate, that reduced expense was a major factor in his being able to factory order 100 percent of his vehicles, as opposed to the extra expense of ordering out of stock. Lower rental expenses make it more cost effective for me to place a driver into a rental vehicle, and place a factory order, rather than pay high stock fees, and lose incentives, Rickard said. Sara Lee Fleet Increases Focus on Maintenance Every time one of the 1,000 vehicles in the fleet of Sara Lee Coffee & Tea Food Service is due for scheduled maintenance, Fleet Specialist Carmella Walsh gets a report in the mail from her fleet management company, notifying her that the vehicle is due for scheduled maintenance. Were focusing more on preventive maintenance to control costs, Walsh said. It helps us avoid the cost of a brake job or possibly running out of oil. Walsh said the notices from the fleet management company come in the mail, Walsh gives the notices to the drivers of the vehicles, and the drivers take the vehicles to local shops to get the repairs done. Lockheed Martin Saves by Transferring/Rotating Vehicles The corporate fleet and asset management departments at Lockheed Martin started a program that involved placing its surplus vehicles on the corporate Web site. Vehicles are offered for transfer between other Lockheed Martin facilities before being sold to surplus vendors and the general public. Gerald Cumby, Lockheed Martin Aeronautics fleet manager and co-chair of the companys corporate fleet council, says this program has saved the corporation $2,315,712 in the last three years. Some say that this was a cost-avoidance in lieu of savings, Cumby said. If we have an understanding that it would have required $3,481,450 to purchase the needed vehicles new, in lieu of using the surplused vehicles, then we can readily understand and justify the documented savings. Lockheed Martin Aeronautics fleet management also implemented a vehicle rotation system for its company-owned vehicles by first identifying low-mileage and low-use vehicle assignments. The department then concluded that rotation or reassignment of those vehicles to the high-mileage and high-use vehicle-assigned departments would get the maximum use of
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the vehicles. CASE STUDY Fleets Choose Fuel-Efficient Vehicles to Control Costs Although retail gasoline prices have stabilized, the high retail prices are having an impact on fleet selector lists. In addition to looking for how suitable the vehicle is for the job, fleet managers are finding themselves looking more closely at those miles-per gallon numbers. The standard fleet car for FCCI Insurance Group in Sarasota, FL is a 4-cylinder Toyota Camry LE. It averages 26 miles per gallon, said Fleet Administrator Cindi Armstrong. Thats a very smart car to use for cost savings. Dominick Susca, fleet administrator for Dunn-Edwards Corp. in Los Angeles, is in the process of deciding on which vehicle manufacturer it will use as its sole provider of vehicles. When choosing between manufacturers, gas mileage may play a bigger part in choosing a vehicle, Susca said. The King County, WA Department of Transportation fleet administration bought 30 Toyota Prius hybrid gas/electric vehicles this year. The motivation for us is the 56 miles per gallon in the city, said Fleet Manager Windell Mitchell. Thats almost three times the mileage we were getting. Over time, it becomes quite a cost-saving measure. He added that he has downsized vehicles for some administrative staff, from intermediates to subcompacts. Other agencies switched from sport/utility vehicles to pickups, in some cases saving up to $6,000 on the purchase price, in addition to the milesper-gallon improvement. At least one utility fleet is looking to save on fuel costs. Otter Tail Power Co. in Fergus Falls, MN purchased a Toyota Prius as a pool car in January of this year. Weve been averaging about 44 miles per gallon on certain routes, said Otter Tail Manager of Transportation Dean Swanson.

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CASE STUDY Consolidation & Standardization of Fleet Cuts Costs Before the Washington, DC Department of Public Works Fleet Management division consolidated and standardized its fleet, the average age of its vehicles was about 14 years. Jeffrey Jones, district maintenance repair manager for the department, said each separate agency purchased its own vehicles, with no standardization to their purchases. That made it tough for us to replace the vehicles and to stock the parts needed to repair the vehicles, Jones said. Jones said that Fleet Administrator Ron Flowers worked with the DC budget and procurement offices to not only purchase new vehicles, but also negotiate for fleet management to take control of all the vehicles throughout the department. Last year, the department received more than $16 million to purchase new vehicles. Before, that money would have been spent by the separate departments to do their own purchasing. Now, it is the agencies responsibility to let the fleet department know what its needs are. Based on needs, our customers now have the option of leasing or purchasing a vehicle from us, Jones said. In addition, fleet administration has created motor pools throughout the city, giving the agencies a third option. By spending $16 million to purchase new vehicles, the fleets average age is now five years, instead of 14 before. Next year our funding for Department of Public Works equipment will be approximately $8 million, instead of the $16 million we spent this year, Jones said. Weve replaced about 80 percent of our mission critical equipment. Were not spending the big dollars to do the major repairs. Now were more into the preventive maintenance cycle rather than the repair cycle. Jones said the amount of money put into parts inventory has also been reduced. Last years inventory was about $1.4 million. This year it is at about $850,000.

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CASE STUDY 2 Public Sector Fleets Raise Minimum Standards to Improve Utilization A department director at Lee County, FL, used to call Fleet Manager Marilyn Rawlings to complain that every time he went to use the car, he needed to jump start the battery. Rawlings looked into the situation and found he had only used one tank of gas in six months. I thought we might have a problem with our software system or something, but I realized he had averaged only 22 miles a month, yet he had a county vehicle, Rawlings said. After looking into vehicle utilization at all county departments, Rawlings and the fleet department decided that unless a driver drove at least 500 miles per month, he or she did not warrant having a county vehicle and the driver would be reimbursed for driving his or her own vehicle. Meanwhile, Rawlings found that because organizations these days are being asked to do more with less, she was spending a lot of time taking phone calls from various departments and defending the number of maintenance hours she was billing to the various departments. We had to research it and then go back and talk to the mechanic to find out how much time was spent on each repair, Rawlings said. The solution Rawlings came up with was to bill the departments a straight 20 cents per mile for their vehicles. But to solve the problem of those vehicles that were under-utilized, Rawlings included a 500 minimum miles per month rule. If a vehicle is driven 20 miles per month, for example, that department will still get billed for 500 miles. If they complain, Ill say, maybe you dont need a vehicle, Rawlings said. It makes them look at how they are using a vehicle, and Im not the bad guy. Rawlings added that the program has generated revenue for her department, enough even to offset the increased price of fuel. Another public sector fleet, the King County Department of Transportation in the state of Washington, has also looked at the utilization levels of agencies with assigned vehicles. Fleet Manager Windell Mitchell said his department assigned a minimum standard of 850 miles per month, or 10,000 miles per year for vehicle assignment. Those departments unable to meet those standards must use pool vehicles. Since last year we significantly increased pool usage and reduced 30 vehicles from the fleet,Mitchell said.

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CASE STUDY County Saves by Sharing Fleet Management Programs About three years ago, the Palm Beach County, FL fleet management division began overseeing maintenance operations for 120 support vehicles of the countys fire and rescue department. Those vehicles include everything thats not a fire truck. But the fire and rescue department did not have an up-to-date work order system, and couldnt sort data or do reports. The department was looking for an automated work order system to track things such as mechanic productivity and time spent on repairs. Doug Weichman, director of Palm Beach County Fleet Management, devised a way to hook up fire and rescue to the fleet management divisions computerized system. We had an automated work order fleet management system that tracks repair history, preventive maintenance, technician productivity, and other reports such as how many vehicles have had brake jobs, Weichman said. So they merged into our work order system and now they can track those things. Weichman said the fleet management division already had vehicle identification numbers of the fire and rescue vehicles in its system, but the longest step in the process was getting fire and rescues parts and inventory system online. So we had to load all the parts numbers into our inventory system, and that took about six months, Weichman said. Fire and Rescue looked at other systems, but the cost would have been $200,000 to $300,000, Weichman said. Instead, Fire and Rescue will pay the fleet management division a fee of $25,000 per year for the first two years, and $20,000 per year for the three years after that, generating income for the fleet management division while saving money for Fire and Rescue.

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Smurfit-Stone Formalizes Fleet Expense Review Process

As important as they are, sometimes formal reviews of corporate expenses are done on an informal basis. Much like a person who doesnt see the doctor until he or she is sick, companies wait until there is something visibly wrong before taking action to analyze where the money is going. If they know what the problem is, they may wait to take action to correct it or minimize its impact. Smurfit-Stone Container Corp., of Chicago, was no different, until last fall, when, in response to a spike in depreciation expense, it set out not only to find out why, but to establish a model which would make the exercise a great deal faster in the future. When completed, it will enable the company not only to review fleet expense, but to perform sensitivity analysis to determine the impact of various best practice changes. Keeping An Eye On Expense Not that fleet expense had been ignored in the past, says Scott Jenkins, Smurfit-Stones director of services. We were always looking at fleet expense, he says. But last fall, it all came to a head. It was a continuing drop in vehicle resale values, along with a corresponding increase in actual depreciation expense, that Jenkins says, he could not allow to continue. The time for wait and see was over. We had to do something, he says. Jenkins has been with Smurfit-Stone for three years, all in his present position, after 12 years with Mc-Donnell Douglas. The Smurfit-Stone fleet numbers around 1,500 units, 1,250 of which are autos, with the balance being minivans and light trucks. Jenkins responsibilities include fleet, travel, material handling (itself consisting of over 4,000 pieces), office supply and equipment, and a wide variety of miscellaneous services. He has four direct reports. Cause And Effect Jenkins started out with an idea as to why resale dollars were shrinking. I like new-car rebates and fleet incentives as much as anyone buying a personal automobile, he says. But there was no question in my mind that they were having an adverse effect on used-car values, and especially the total cost to run Smurfits fleet. Not only cars, but also Jenkins said there was a similar effect on material handling and office equipment. So last fall, Jenkins began to gather all the corporate resources available, including their corporate financial staff, to work on a means by which this, and other, fleet expense problems could be reviewed and acted upon. The first step, he says, was for himself to get a better grounding in fleet management. Suzanne Hedger, Smurfit-Stones corporate manager, leased automobiles, has been a great help in Jenkins fleet education. Suzie has been with the company for 20 years, and she has been a key factor in the success both of our fleet program, as well as this project, he says. With Hedgers help, Jenkins examined the interdependencies of fleet variables; that is, when one is affected, others are as
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well. I realized that there were so many variables, says Jenkins. And to simply look at them in a vacuum would be confusing. The answer was to create a model, so that the options could be looked at easily, and sensitivity analysis (what ifs) performed. Three Components Jenkins tapped a number of outside sources for benchmarking information and statistics, including the National Association of Fleet Administrators and the companys suppliers. Jenkins says that he then broke the fleet function down into three broad categories: Strategy Should we have a fleet or not? Should we reimburse? Should we limit the assignment of vehicles? Tactics What kind of fleet should we have? Who should be given a vehicle? Should we operate cars, vans, or trucks? Day-to-Day How should we provide the fleet? Should we lease or own? How should it be maintained, and administered? I believe that we should begin the process by asking the essential question of whether or not we should have a fleet at all, Jenkins explains. There are, of course, options available, such as reimbursement. The purpose of the exercise is to create a means by which the entire fleet operation can be analyzed on some regular basis, and that includes whether to have a fleet at all. For example, Jenkins says he has a driver whose annual mileage of 40,000 miles includes only 4,000 business miles. Now, if this driver is only doing 4,000 annual business miles, why do we provide a car? Is there a sensible alternative? This is the kind of question that the model will help us answer. When completed, the model would present the various scenarios available to the company, provide evidence of problem areas, and lead to solutions. The benchmarking of expenses is particularly important. I am still on a learning curve vis-avis fleet, Jenkins admits. The ability to benchmark information, to see how we do in comparison to other like fleets, as well as how we do versus our own past performance, is telling. Jenkins says that the answers to the immediate problem (low resale/high depreciation) would likely be somewhere down in the day-to-day area. My primary background is not procurement, but I believe with the companys purchasing power, the strategic answer is to have a fleet program. My background in cost and financial analysis forces me to look for solutions in those terms. With 1,500 units, Smurfit-Stone has purchasing leverage, and Jenkins believes that they should take full advantage. Changes To Date Though the model is not yet quite complete, Jenkins says that their analysis thus far has led to several changes and enhancements to the program. Weve begun to single source, through attrition, to provide maximum leverage in pricing, he says. Lowering the capitalized cost of their units helps to lower net depreciation cost. Aggressively pursuing employee sales of out-of-service units will also help Smurfit-Stone
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stem the loss of resale value. Weve always offered vehicles coming out of service to employees, Jenkins explains. But we are now beginning to pursue this option more aggressively. Other actions taken so far include the tweaking, as Jenkins puts it, of their amortization rates in the lease and limiting vehicle selection. The ultimate goal in amortizing a vehicle in an open-end lease is to have the remaining book value reflect the market value, as closely as possible, at termination, he says. This smoothes out cash flow and avoids large accounting adjustments at the end. Limiting vehicle selection, Jenkins concludes, is a natural offshoot of the new strategy of single sourcing. Seasonal buying is another area of focus. Our immediate problem has been deteriorating resale values, Jenkins says. In the day-to-day category, Jenkins says that they have outsourced a number of administrative and clerical fleet management functions. Things such as MVR checks, license renewals, and driver background checks have all been outsourced. Our vendors have access to greater resources and expertise in these areas than we do. Going Forward As Jenkins said previously, just looking at the problem in the immediate would be too shortsighted; his goal is to create an entire analytical process, which would not only help solve the current problem, but enable Smurfit-Stone to examine the entire fleet program whenever it sees fit. The project, once complete, will make things far more simple, and hopefully successful, going forward, Jenkins says. He is preparing a presentation that includes a series of Excel spreadsheets covering all three fleet decision making categories (strategy, tactics, and day-to-day). Jenkins is quick to give credit where credit is due. Suzie Hedger has been enormously helpful in our putting together this project. Her experience and understanding of fleet issues is invaluable. And now, as the project nears completion, Jenkins is confident that SmurfitStone will be able to pinpoint problem areas, and take action, more quickly than ever before.

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The Effective Management Of Net Depreciation Expense

No matter how you go about managing it, net depreciation eclipses all other expenses today as a percentage of the total cost to own or lease any fleet, and that fact is unlikely to change anytime soon.

In 2003, net depreciation towers over all other fleet expense categories making up almost twothirds of the total cost to own/lease and operate a typical fleet. Things werent always that way. Chart 1 provides a quick glimpse of new vehicle pricing over the last half-century. Using a Ford and a Chevrolet as examples, a common sedan could be purchased for around $1,450 in 1950.Pricing progressed at a modest annual rise until 1975 at about $4,000. After 1975 prices exploded and went on a steep incline to present.

The Two Dominating Fleet Costs: 1950 and Present

Fuel and net depreciation were the two dominant fleet costs in 1950 and remain so today, with one critical difference. As shown in Chart 2, fuel was the dominant expense in 1950, accounting for 62 percent of the total fleet cost when fuel and net depreciation costs are combined. Depreciation was a trailing second at 38percent. Net depreciation rose to 50 percent in 1970. However, the 1973FORD & CHEVROLET 74 oil embargo caused fuel to spike HISTORICAL NEW VEHICLE PRICING dramatically and net depreciation fell back to under 50 percent again. 1950 Through 2003: However, it was not to be denied Fleet-Common 4-Door Sedans superstar status for long. The relentless Both make/models came in at around $1,450 in 1950, increased in price modestly to about cost of new vehicles continued to rise $4,000 in 1975, an increase of around 176 and by 1988 it was once again 50 percent since 1950. percent of combined net depreciation and fuel expense. In 1990, it edged out fuel again 53 to 47 percent. From there depreciation never looked back, progressing steadily upward. Today, it represents 66 percent of the combined costs with fuel now at 34 percent a 180-degree reversal from 1950.

The Big Picture

In 1970, the PM/mechanical repair (MR)/Tire group of expenses made up 11% of the total expense versus net depreciation expense at 60%. In the three decades since 1970, the PM/MR/tire expense group has shrunk to 4% of total fleet expenses while net depreciation expense has increased to 72%.

Most people would probably generally surmise the above. But a much smaller group would realize the real expense history. Lets look at total fleet expenses from 1950 to present and segregate them into two groups. The first group is Net Depreciation & Related Expense. What is related expense? Lease/finance, lessor administration, and sales tax/tax-on-rental are all automatically affected by the price of the new vehicle. They automatically rise or fall depending on new vehicle price. The second group is All Other Expenses: fuel, preventive maintenance, 73 minor/major mechanical repair, license/registration, parking/tolls, washing, and insurance everything not included in the first group. When the total picture is assessed, we find that Net Depreciation & Related was actually 49 percent of the total cost even back in 1950. By 1954 it had broken the 50 percent barrier at 53 percent. With the exception of 1974, when it declined to 46 percent, it never again fell under 50 and totally dominates in 2003 at 72 percent of the total. There is also a shift in 20-year increments. With net depreciation and automatic-related expense currently swallowing close to three-quarters of todays total fleet
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budget, hopefully fleet management has shifted its focus to this single and rising cost. As recently as 1970 M/repair/tire costs still engulfed 11 percent of the total. No more. Those three cost categories have now shrunk to four percent of the total. Woebegone is the 21st Century fleet manager still spending a heavy percentage of his or her time pouring over repair and tire expense runs while the train pulls out of the station. Ignore net depreciation expense at your peril because the result will be mediocrity.
Net Depreciation & Related compared to All Other in 1950 it was 49/51%; in 1970 it was 60/40%; in 1990 it was 69/31%; and in 2003 it was 72/28%.

The Two Elements Of Effective Net Depreciation Management

If you havent been doing it before, you are hopefully ready to focus on net depreciation like a laser beam. The two elements of must control are to manage the front and back doors, and one is no less critical than the other in dollar impact. (See Start Depreciation Control When You Buy the Vehicle, Fleet Financials, January/February 2002.) Managing the back door begins long before you order your first 2004-model. The old saying is: So goes the new car, so goes the used car. What is popular with the retail new-car buyer will likely be popular with the used-car buyer as he or she is simply a would-be new-car buyer without the financial wherewithal. So before you select your 2004 make/models, review what the hot new-car sellers were in the past. For example, Ford Focus was the top banana in 2001, garnering 7.7 percent of total domestic retail car sales, followed by the Taurus and the Chevrolet Cavalier, both exceeding six percent. The Mustang and the Impala round out the top five.

Review of 2001 Retail vs. Commercial Fleet Sales Domestic Make/Models - Top 10 Fleet/Retail Sales

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Fuel cost dominated in 1950, making up 62 percent of the total fuel/net depreciation costcombination. From 1973 on, net depreciation made up an ever-increasing percentage of the combined fuel/net depreciation total. In 2003, net depreciation makes up 66 percent of the total with fuel being less dominant at 34 percent. Expense is broken out into two groups: Net Depreciation & Related and All Other. Net Depreciation & Related was 49 percent of total expense in 1950. By 1954 this expense group had surpassed All Other 53 to 47 percent. The Net Depreciation & Related expense group has grown steadily since 1954 to present, encompassing 72 percent of total expense in 2003.

Top 14 Commercial Fleet & Retail Sellers in 2001 Sales as a Percentage of Original Costs at 1 Year
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Domestic Make/Model Ford Mustang Chevy Impala Buick LeSabre Pontiac Grand Am Ford Focus Mercury Sable Dodge Stratus Chevy Cavalier Pontiac Grand Prix Buick Century Ford Taurus Dodge Intrepid Saturn SL2 Chevy Malibu 02 Sales Rank in Fleet N/A 2 N/A 6 7 9 10 8 4 N/A 1 3 N/A 5 02 Sales Rank Within Group Retail 4 5 9 6 1 N/A N/A 3 N/A 10 2 N/A 7 8

The above 2 charts show 14 of the 20 cars graphed in order of their retention of original cost (invoice) as one-year cars as reported by Black Book. Of the top five percentage retention cars, four placed one, four, five, and six in the top retail sellers. Of that same top five, fleets bought heavy on the Impala, lighter on the number four Grand Am, and even lighter on the Focus. It appears that the new-car retail buyers are considerably better forecasters of the used value of what they buy than the fleet buyers are. When it came to the Saturn SL (a sedan), a car that ranked seventh in domestic retail sales and retained 62 percent as a one-year-old in value, fleets pretended that it didnt exist buying a scant 689 units in 2001, a mere 0.9 percent of fleet sales. Could it be that some of us are a bit too focused on fleet incentives?

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Maximizing Your Fleet Incentives

Once you make your preliminary selections, managing the front door comes to the fore. (See Are You Maximizing Your Fleet Incentive Money? Fleet Financials, September/October 2002.) Maximizing your fleet incentive money is a critical element in the total scheme of effectively managing your net depreciation expense.

Used-Car Market Timing

Market timing plays a large role in your eventual bottom line net depreciation expense and cannot be emphasized enough. (See Market Timing Critical in Achieving Top Resale, Fleet Financials, May/June 2002.) Additionally, hold your lessors and/or wholesalers feet to the fire. Book every sale against Black Book or Automotive Market Report as to the percentage of Clean price youre getting. Run your sales on a spreadsheet. Sort by lessor/wholesaler/ auction, draw average percentages of Clean, and dont be shy in raising your hand if you detect sub-par performance. The back door is critical.

9/11 and Zero/Zero/Zero

There have been considerable discussions and editorials over the past 20 months on the impact of the WTC attack on 9/11, and the subsequent auto-dumping by the rental industry as well the subsequent zero, then zero/zero/ zero financing introduced by the auto manufacturers converting many former used-car buyers into new-car buyers. We decided to take a look and see if we could quantify the impact. We tracked two models, a 1998 Chevrolet Lumina and a 2001 Lumina selling over identical pre and post 9/11 zero/zero/zero periods. Both models are calculated at retention of original cost (invoice) percentage. All things being equal, both models should have retained close to the same percentage over their 15-month period which represented moving through their year two and into three years of age. This was not the case. In November 1998-2001 they were over 13 points apart with the 2001 model being down about two months after 9/11 and amid massive rental car dumping. By February 1999- 2002, the gap narrowed to 2.3 percentage points. Then it appears that zero/zero/zero kicked in with full force. The gap widens, reaching 11.5 points by midDecember 1999-2002. About the only defense available to the fleet manager was to hold his vehicles and wait for better times which havent arrived yet, with the 1998 model still running ahead of the 2001 59 to 47 percent in January 2000-2003 comparison. In fact, the actual value of the 1998 in January 2000 was $9,215 as opposed to the 2001 in January 2003 at $8,350, about $865 more.The only time the 1998 models actual value fell below the 2001 model was briefly in the January/February period. Otherwise the value of the pre-9/11 1998 Lumina exceeded that of the post-9/11 2001 Lumina notwithstanding the three-year new car price difference between the two. There can be little doubt that 9/11and zero/zero/zero burned the fleets badly on the used-car market.

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Employee Sales Are a Win-Win

Selling used company vehicles to employees, their relatives, neighbors and friends is a winwin for both the company and the employee. Using a 1997 Ford Taurus as an example, the car had an AMR-Clean value of $10,630 (100 percent benchmark) at 24 months in service. Assuming that the fleet manager was zeroing in on the wholesale market like a hawk, the company was realizing an average of 80 percent of Net AMR-Clean on their wholesale marketing operations, or $8,565 on this Taurus.If the company were to market this Taurus to the employee at 90 percent of AMR-Clean the result would be $9,565.At 95 percent revenue would be $10,100 anywhere from $1,000 to $1,535 more. Thats the company side. If the employee were to buy an identical Taurus on the open retail market, his cost would be in the 121 percent of AMR-Clean range, about $12,840. In opting to buy the company car, he saves between $2,750 and $3,275 on the deal.

Wholesale/Wholesale, Wholesale/Retail Win/Win: Employee Sales

1997 Ford Taurus GL Sedan: Values in Oct. 1998 @24 Months of Service AMR- Average Retail Value AMR Clean Auction Typical Wholesale/Wholesale Wholesale Value (Net AMR Clean) Value 121% ($12840) 100% ($10,630) 180% ($8,565 These arent concise stats to be applied universally and it will vary depending on year/make/model, but you can definitely see here the benefit to your company isnt going to be nickels and dimes. Add to that the fact that the employee is not buying a pig in the poke. He or she has been driving the car for the past couple of years. If its a good, solid car, the driver certainly knows about that as he or she has had an extended two-year test drive. Ray Apel, fleet manager for Solvay Pharmaceuticals, 1,106-vehicle fleet in Marietta, GA, sums it up pretty well when he says: We aggressively market our used company vehicles to employees at a wholesale fair market value, plus a market adjustment of $500. In this manner, the driver is buying the car for less than a retail price, but we are also realizing more than what we would get straight wholesale. Apel has been at Solvay a little more than a year. During that period he has thus far racked up $856,000 in Solvay fleet savings, part of which he attributes to the Solvay aggressive employee-sales program. Many companies offer the sale of the used company car to employees. There is nothing new about that. However, how many of those have fleet managers who aggressively market the program? And how many have a policy buried somewhere in the company vehicle policy, a policy that few drivers ever see, which makes employee sales basically a word-of-mouth program. The latter results in mediocre semi-retailing, selling 20 percent at best to employees. Aggressively marketing employee sales, starting even before the driver picks up the car new, can increase employee sales to 50 percent or more. And what are we really talking about in terms of dollar impact to the companys bottom line?

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Lets examine employee sales program differences in two fleets, both 3,000 vehicles in size, both with identical make/model make-up, and both marketing the same number of vehicles over the same periods of time and on identical dates. Further, both fleet managers realize 80 percent of AMRClean on their wholesale operations. Both offer their cars to employees at 90 percent of AMR-Clean. The sole difference between the two fleets is that the fleet one sells to employees pretty much word-of-mouth, resulting in 20 percent of the used being sold to employees and 80 percent going on the wholesale market. The other fleet shown has an aggressive employee sales marketer at the helm resulting in 50 percent of the companys used cars being purchased by employees and 50 percent going on the wholesale market. Over the period, the first fleet realizes $8,466,000 with its 20/80 sales mix. Meanwhile, the second fleet brings in $8,776,000 in used revenue with its 50/50 sales mix $310,000 more. A company or lessor selling its vehicles right might expect to average 80 percent of AMR-Clean excluding totaled or badly-damaged vehicles. Selling at 90 to 95 percent of Net AMR-Clean to employees would result in 10-15 percent greater revenue to the company, and result in the employee saving from 25 to 30 percent over what he/she would pay on the open market for the same vehicle.

A Big Plus Employee Sales Marketing Technique

If your employees are like 95 percent of the vehicle-buying public, when buying a new or used vehicle, they finance it. The current general method is that the fleet manager quotes the employee a price on the used car and then requires that the employee forward him a cashiers check made payable to the company (owned fleets) or the lessor (leased fleets) in the quoted amount. Where and how the employee gets the money is up to him. Some are now undertaking a more innovative and aggressive approach. LeasePlan USA and the Donlen Corp., two large lessors, have signed up with Fourth Fleet Financial, a provider of used vehicle financing in Austin, TX. Of Fourth Fleet, John Rancourt, director of used vehicle marketing at LeasePlan says: We needed additional flexibility to accommodate a variety of situations. With Fourth Fleet Financial, we are able to bring in a wider number of financing partners and options to find the best funding sources for each buyer. It is truly a customized process. Layne Weber, director of vehicle remarketing for Donlen, explains: Until now, we have steered clear from adding financing to our current program as the existing (financing) market solutions have not been sufficient to meet the needs ofour clients. We think that the Fourth Fleet program is a nice option for our client base. Jeff Danford, president, and Tim Janssen, vice president, business development, founded Fourth Fleet Financial. Janssen explained the basics of the Fourth Fleet program. In addition to large firms such as LeasePlan USA and Donlen, Fourth Fleet has also signed up smaller lease management companies such as ULTEA, based in Wisconsin. FourthFleet has a portfolio of lenders covering prime, near prime, and sub-prime lending to handle employee applications from all walks of creditworthiness. Finance program highlights include: 100percent financing for qualified buyers, extended finance terms, extended service contracts, no vehicle mileage limits, and the best available finance rates. Janssen explains that the process is customized to fit each partners specific needs. In the case of the LeasePlan implementation, Fourth Fleet receives the vehicle price quote, the potential buyers name,
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telephone number, email address, year/make/model, and mileage data from the lessor. Fourth Fleet then contacts the employee, procures the credit information and takes it from there. Average transactions range from two days to a week to complete from start to finish. Car ordering and and/or delivery cycles can elongate that process at times. Fourth Fleet fees come from the lender. The Fourth Fleet client lessor incurs no fee. And what of the owned fleet or of the leased fleet whereby the fleet manager prefers to do business with Fourth Fleet direct? No problem, states Janssen. In that event, our point of initial contact is with that company fleet manager.

The Bottom Line

No matter how you go about managing it, net depreciation expense towers above all others today in percentage of the total cost of operating any fleet, and that fact is unlikely to change anytime soon. Those who devise methods and execute them will wind up in the fleet management winners circle. Those who do not do so at their peril. Written By: Terry Flesia is president of AutoCross & Associates, a fleet consulting firm in Irvine, CA.

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