Can you identify the true cost of your fleet management business? by Mike Corbett, Publisher

Comparing notes with other fleet managers about the cost of fleet operations is often a futile exercise because of different methods of identifying, structuring and calculating fleet costs.

Identify all costs

Identifying costs is the key to management of any service yet most fleets do not identify the full cost of fleet services. For example, while direct costs are included in fleet program budgets, they reflect only the tip of the iceberg as important indirect cost allocations are consistently left out of the equation. In these situations, the true cost of fleet management is actually much higher than recognized and decision making regarding the fleet function is conducted in an erroneous factual environment.

One of the best ways of establishing the actual costs of fleet management is to calculate the cost of the service as if it were offered for the first time. In our studies of outsourcing and privatization, these costs not included in program budgets rise to the top and the full cost of fleet management often gets revealed for the first time. As a result, fleet managers may have to acknowledge that their existing model of economic cost and chargeback may be obsolete.

Comparing notes with other fleet managers about the cost of fleet operation or cost per mile often is a futile exercise because of different methods of identifying, structuring and calculating costs.

Costs that should be identified in departmental divisions that support fleet management are allocations such as purchasing, budget, insurance, accounting, building costs and services. These should be allocated to Fleet Management in calculating total fleet costs.

As a result, fleet organizations need to identify all of their costs and recover the total cost of fleet management from their customers. When customers are not held accountable, costs tend to rise and care for vehicles and equipment lessens. When costs are made visible, fleet customers tend to economize and keep costs manageable.

A properly developed structure should identify and account for the entire cost of fleet management, recover all costs through a properly designed charging system, assist in funding a rational replacement program and allow cost comparison or benchmarking with other fleets

Identify each operating service

Not only do some fleets ignore the identification of important costs, but many are not structured to evaluate the competitiveness of their services in the marketplace. Once all direct and indirect fleet costs are identified, the cost of each fleet operating service can be calculated for ongoing competitiveness analysis.

Fleet operations can be broken down into various functions or activity centers in which fleet personnel spend the majority of their time. In smaller fleets, those activity centers include maintenance and repair, parts services, fueling services and motor pool services.
In one large city fleet, we identified fifteen such categories or activity centers including administration and asset management, light, heavy duty and small equipment maintenance and repair, sublet work, paint and body work, vehicle make ready, fueling, parts procurement, parts room, parts distribution, salvage, tire shop, transporting vehicles, wrecker service, car wash and motor pool.

Once this categorization is complete, staffing and operational costs such as salaries, benefits, services and supplies can be distributed across all activity centers. City allocated costs can be identified in departmental divisions that support Fleet Services, such as purchasing, budget, accounting, building, etc. These costs can be distributed based on the operational cost or the total FTE’s of each cost center. Then, total costs associated with each activity are calculated and utilized as a foundation to formulate labor rates and markups in determining the efficiency of these services.

Unit costs and efficiency measures

Once all operating services are identified and the cost of each fleet operating service is calculated, unit costs or measures of efficiency can be determined. Unit costs typically calculated include: Maintenance: fully burdened labor rate for light and heavy equipment maintenance; Fuel: fully burdened rate for a gallon of fuel; Parts: percentage charge markup on the price of a part; Motor Pool Vehicle: fully burdened daily rate for a motor pool vehicle by class of vehicle; and, Vehicle Wash: charge for a vehicle washing.

These measures permit fleet managers to review the efficiency of each fleet service and measure their fleets against other providers of these services. Moreover, it makes fleet management aware of its costs and encourages fleet customers to hold fleet management accountable for the cost and value of each service.

While these measures require close analysis, they provide important indicators of fleet efficiency as well as a starting point for assessing fleet services against other private and government markets for these services.

By understanding these costs, a fleet manager can also take the corrective actions necessary to keep them competitive, manage staff size to a minimum, implement automated technology to stream¬line operations and use private sector services where it makes sense.

Identify vehicle costs

Another problem in assessing the market cost of fleet services is getting to the issue of the true cost of a fleet vehicle. A continuing problem for many fleets is establishing a vehicle classification structure that groups like vehicles and equipment for the purpose of identifying costs, assessing rates and charges, comparing costs, or equitable funding of fleet operations and replacement.

As a result, customers in some fleets subsidize other customers contributing to lack of credibility in the cost of fleet management. If the entire cost system is structured poorly, fleet management operates without the accurate cost of a fleet vehicle or a class of fleet vehicles. How can good fleet management occur within such an environment?

If structured properly, vehicle class costs can be compared to industry experience and fleet budgets targeted and limited to those cost norms in the marketplace for the particular fleet service. This places appropriate pressure on fleet management to replace vehicles when they are uneconomical, specify the right vehicle for the job, comply with appropriate preventive maintenance schedules and be efficient in performing vehicle repair services.

This method contrasts with the cost creep that occurs in many organizations responsible for inefficiency. While there is a competitive market for fleet services, many fleets do not base salary and wage increases and other internal fleet price increases on the marketplace.

Over time, this approach widens the gap between the market price and the cost of fleet services so that many fleets are carrying technicians at costs which exceed the market. Therefore, proper assessment of costs and charges to a carefully structured classification system is paramount.

Encourage economical behavior

Once a proper structure is in place, how does a fleet manager use the market mechanism to minimize overall fleet costs?

The trend for most fleets has been to create an internal market system using a transfer pricing concept or a chargeback system to assess their customers for the cost of fleet management. A market pressure is thus introduced for negotiating prices between buyers of services (fleet customers) and the seller of services (fleet management).

In a non-chargeback environment, there is political pressure and little market pressure. The biggest, most vocal and powerful customers tend to get their way in the allocation of fleet resources. In these examples, fleet budgets tend to run out before the end of each fiscal year!

In a chargeback environment, fleet costs tend to be lower since the market provides a pressure (or choice) for fleet customers to economize. In this environment, a vehicle charge system is developed to recover the fleet's maintenance and operating costs and capital needed for vehicle replacement. Customers budget for expenses and monthly billings are made to generate the revenues required. This approach provides revenue that provides the obvious costs of the program.

However, this is not the main issue. The central issue is how to use the chargeback system as a means to encourage responsible, economical behavior on the part of fleet customers to keep costs in line with the market.

Many fleets charge their customers but they do not use the chargeback system as a tool for managing the allocation of fleet resources or managing the demand for service. Nor do enough fleets construct partnering agreements with their customers. Thus, a critical opportunity for managing and reducing fleet costs is often lost.

For example, if vehicle customers are charged directly and appropriately for vehicle abuse and accidents, they are influenced to perform operator maintenance and participate in driver safety and improvement programs.

If the chargeback system properly assigns the full cost of ownership to the replacement charge rate, customer departments are encouraged to size their fleets correctly. Thus, in these examples, the chargeback system may be successful in influencing driver behavior and managing fleet size -- two large costs in most fleets.

A chargeback system might also be structured to resemble the way that most maintenance privatization contracts are organized, that is, be very specific in separating the issues of "wear and tear" from other incidents such as neglect, abuse and accidents ensuring that customers are responsible for their actions.

Just because a fleet maintenance organization is operated internally does not mean that internal customers should be less constrained in spending fleet resources or in using chargeback management practices that lead to lower costs.

Fleet Managers can provide competitive fleet services to their customers provided that the cost of the service and each fleet vehicle is identified fully and classified properly. Only then can the competitiveness of the fleet be assessed in the marketplace. Using the chargeback system as a market mechanism can serve to assist in managing and minimizing these costs. This is one approach for achieving market driven fleet services.