3. 3
FLEETCUBE PUBLISHERS
67 7TH
Street, Linden
Johannesburg
South Africa
First published in 2004
Second edition 2012
By FleetCUBE
Copyright by Michael Crankshaw 2012
This book is sold subject to the condition that it or any portion of it,
shall not, by way of trade or otherwise, be lent, resold, hired out, copied
or otherwise circulated without the publisher’s prior consent.
4. 4
FORWARD BY MICHAEL CRANKSHAW
One of the biggest problems facing fleet managers in today’s business environment is the
lack of published material on the many aspects of fleet management. True, there are many
fleet management companies that offer a multitude of fleet management services and fleet
management computer systems.
It is also a fact that these companies constantly produce articles and information on fleet
management operations. The problem is that there has not been a single source that
covers the essential vehicle management issues that relate to the day to day operations of
running a fleet of vehicles.
Vehicle management is quite a complex business discipline especially in today’s business
environment. For anyone person to do this on a cost effective basis and constantly be up
to date on the many issues related to managing a fleet and its drivers is a serious challenge.
Our company has been providing fleet management training courses at various levels for
over 20 years now. Over this time we have gone through many experiences as we have
developed the most effective teaching methods for this management discipline.
However the one thing we lacked in those early days was a comprehensive manual or book
to give to the course delegates, not only as a manual but as a reference for their future use.
Here I must pay a sincere compliment to Dave Grant of PHH Fleet Services in the US.
He was my mentor in the mid seventies when I was the Managing Director of PHH South
Africa. This was the first fleet management company in South Africa. We called him
‘Professor Dave’ because of his vast experience and detailed knowledge of fleet
management. It was through the many discussions with Dave that I was able to put the
many aspects of fleet management into simple management ‘boxes’ such as the ‘Simplified
life cycle’ that we still use in our teaching programme.
This book has been written to cover the practical issues of fleet management. Although it
is very comprehensive it certainly does not purport to cover every aspect of fleet
management. In fact there is enough material for almost another book. Still, as most people
say, “I didn’t realise that vehicle management was such a big subject!”
To those of you who are moving into a fleet manager’s positions for the first time, or those
of you who have been around for a while, or to those company executives somehow
involved in your company’s fleet, I know you will find many useful, vehicle and driver,
management operational guidelines in this book.
One last but important point. I live and work in South Africa even though my work takes
me to many countries around the world. Inevitably this book has a South African slant but
the principles covered in this book are universal and can be applied to any vehicle and
driver management situation.
Michael Crankshaw
CEO
FleetCUBE
January 2012
6. 6
CHAPTER 1
GENERAL VEHICLE MANAGEMENT CONCEPTS
Every country in the world has its own economy that in turn affects its motor industry.
Every country also has a vehicle market which varies considerably dependant on its overall
economy.
Corporate annual sales vary in different countries from 25% to 75%. This makes it one of
the largest industries in the world and in turn this creates some very unusual situations in
the various local motor industries.
Like any other business discipline, vehicle management has its own theory, technology and
business practices. If these are applied properly in a corporate environment the result will
always be effective, cost efficient vehicle management. The opposite is equally true.
Vehicle operating costs are often a company’s second highest cost after the costs related to
employees. In a world of constant inflation, vehicle costs continually rise and they always
need careful management.
This chapter will provide some essential vehicle management facts that are important to
know when controlling a fleet of vehicles. Please remember however, that this information
constantly changes within your local industry and you will need to keep up-to-date with the
current and relevant statistics.
The information covered in this chapter will help you to –
• Know what basic information you need as a vehicle manager and
where to source this information.
• Learn the basic concepts of vehicle management as a business
discipline and some of its history.
• Know the key elements of a vehicle management programme and how
they can be applied.
• Understand the concepts of “the vehicle life cycle” and why it is
important in vehicle operations.
• Know the elementary concepts of the ten main areas of vehicle
management.
INFORMATION RESOURCES
Motor industry statistics can be obtained from various resources. Some of these
resources are:
The motor manufacturers
The National Association of Automotive Manufacturers
Vehicle Rental and Leasing Associations
The Government Department of Statistics
Industry Surveys
The Internet from websites such as www.fleetecube.com
7. 7
Vehicle management statistics however have to be obtained from the suppliers of
these services. These are not easily obtainable due to the highly competitive nature of
the vehicle management industry.
The following information is important to know and you should be in a position to be
able to update it on a regular basis. You need proper information to make sound
management decisions
Total Vehicle Park for the country
Total Vehicle Park split as follows)
- Vehicles
- Light commercial vehicles
- Commercial Vehicles
Total vehicle sales per annum (Split as follows)
- Vehicle Sales – and by individual models
- Light commercial vehicle sales
- Medium Commercial Vehicles (MCVs)
- Heavy Commercial Vehicles (HCVs)
- Total Sales to Corporate Customers
- Total Sales to Private Individuals
Vehicle Allowance Drivers (Self owned) as a Percentage of the Total Corporate
Vehicle Park
The main reason to have this basic information is to use it when setting up a company
vehicle policy. You need to know what is happening within the local vehicle industry to
make proper policy decisions for the company fleet.
THE FLEET CARDS
The Fleet Card Industry has been operating since the early 1980’s. It has grown
considerably over time. The fleet card enables the driver of a vehicle to purchase fuel,
services and repairs on credit.
The suppliers of these cards have traditionally been the banks, mainly because these
cards are credit cards. However other suppliers of vehicle services now offer these cards,
branded with their names on the front of the card. They are still generally controlled by
the banks as credit cards.
Over the years, the banks have also tied up important agreements with petrol stations,
dealers, workshops, toll roads, tyre outlets and other accessory suppliers. This has
created a very favourable situation for vehicle owners because these cards are now
accepted for vehicle related purchases.
Apart from the card services, the vehicle owner receives a number of reports at the end
of each month on various aspects of the vehicle’s operating costs. These reports cover
fixed and variable operating costs in terms of costs/ kilometre and Rands spent.
This is a very important business and offers vehicle owners many benefits in controlling
vehicle operations and the related costs. This is borne out by the high level of usage by
vehicle owners.
9. VEHICLE MANAGEMENT
The question now is “What Is Vehicle Management?” Many people and companies
who work in this industry use this term rather loosely. The correct definition is:
A specific management discipline with its own recognized theory and techniques
applied in the following areas of managing and controlling a fleet’s operations:-
- Financing
- Cost Control
- Replacement Control
- Purchasing
- Disposal
- Maintenance Management
- Workshop Control
- Route Control & Schedule
- Operations
- Vehicle asset management
- Driver Training
- Selection
- Eligibility
- Private Use
- Administration
- Insurance
- Depreciation
- Fuel
- Tyre
- Utilisation
- Availability
A BRIEF HISTORY
Vehicle management started as a management business discipline in the USA in 1945. The
first two companies were Wheels and PHH. These services have since spread to Europe,
England, Asia and many other counties.
The vehicle management industry started in South Africa in 1974 when a joint venture was
formed between PHH and Nedfin Bank. Today it is a well-developed industry, with many
companies and banks providing services in this market.
WHAT IS A COMPANY ACTUALLY CONTROLLING IN TERMS OF VEHICLE
MANAGEMENT?
Most corporate managers do not really understand what needs to be controlled. It is often
seen as a corporate overhead that is controlled through various General Ledger accounts.
However it is very important to realise that the company is actually controlling its fleet of
vehicles AND a group of drivers, who in turn, have a significant effect on the actual
operating costs of the company’s vehicles.
You should never forget this fact. 100 vehicles cost in the region of R11.5 million per annum
(2011). 100 drivers or employees will also cost a company about R20 million per annum in
salaries and overheads.
Each of these costs, vehicles and the drivers are affected by the other and need to be
properly managed.
10. 10
DEVELOPING A SUCCESSFUL VEHICLE MANAGEMENT PROGRAMME
NEEDS THE FOLLOWING KEY ELEMENTS
There will always be a few key elements in any part of a company’s business that make it
successful. These are the main elements in terms of vehicle management.
• Overall operating costs should be in line with your company budgets and the market
norms for similar types of vehicles.
• You must understand and recognize changes in market trends and statistics.
• You must take into account both the vehicle and the driver
• You must use sound vehicle management principles and techniques in each area of
vehicle management.
• Finally, the fleet of vehicles must be properly managed within the company’s overall
operating policies related to corporate objectives, budgets, marketing, personnel policies,
etc.
THE THREE CORE MANAGEMENT SEGMENTS
In its simplest form, Vehicle Management has to take cognisance of THREE core areas:-
POLICY DEVELOPMENT
These are the rules and regulation that set out the policies related to the daily
operations, for both the vehicles and the drivers.
ADMINISTRATION
This is the actual management process that delegates responsibility and
authority to various managers who control the policies and systems used to
actually run the vehicles and control the drivers.
COST MANAGEMENT
This is the key to ensuring that the vehicles operate at accepted cost efficient
levels within the company and its type of industry. Cost information must be
combined with usage, i.e. kilometres, to ensure that you have the appropriate
information. This information is usually expressed in terms of Rands and
cents per kilometre.
Like any business process, costs and actual budgets give feed back as to how effective the
policies and administration are.
THE VEHICLE LIFE CYCLE
Your question at this point could well be, “What areas of Vehicle Management does this
apply to?” The answer is – ALL OF THEM!
To give you a simple explanation, let’s look at what is called the Vehicle Life Cycle. Take any
one vehicle as the example and you will see that you will usually be involved in the following
business process: -
11. 11
• SELECT the vehicle, based on various criteria.
• Decide when and how to BUY it.
• Consider how to FINANCE it. Pay cash or get finance from a bank.
• Manage the MAINTENANCE, FUEL, OPERATIONS and DRIVERS
for the vehicle’s in service life.
• Make a decision when to REPLACE it, based on the industry criteria.
• Finally, SELL it to achieve the best resale price.
• Then calculate its Total Lifetime Costs in order to analyse its cost
effectiveness in the fleet. This costs is often referred to as the vehicle’s
TCO.
As you can see, these actions can become quite complicated if you have a mixed fleet of
vehicles ranging from top management vehicles down to light commercial vehicles and other
larger commercial vehicles. Each corporate fleet of vehicles requires an effective policy, good
administrative and proper cost management decisions.
It is very important to remember that Vehicle Management is a TOTAL BUSINESS
DISCIPLINE that involves the management of both vehicles and the employees who drive
the vehicles.
12. VEHICLE MANAGEMENT – THE CRITICAL AREAS
Vehicle management – a statement that conjures up many thoughts in the vehicle owner’s mind –
from “what’s that?” to “properly applied, these management principles control costs”. Like all
management concepts there are a number of well-proven principles which, if applied properly in
the decision making process, place efficient control on vehicle operations.
Vehicle costs will always continue to escalate at a level above current rates of inflation. A good
fleet manager will always apply the correct vehicle management principles. But if this is not
done, your vehicle-operating costs will put unnecessary strain on the company’s profitability.
What follows is an OVERVIEW of the main areas of vehicle management. It is an introduction,
which you can always refer to as a quick reference of these core issues.
ELIGIBILITY
Historically, companies have given company vehicles to certain of employee as a part of
their overall job requirement. Because of the relatively high price of vehicles, these have
also been given as a tax free perk. However, with vehicle prices continually rising, the
concept of who should actually have a corporate vehicle needs constant and careful
review.
Within a company, the vehicle fulfils three main functions:
• Provides employee transport – essential to the field staff and a perk for the executive.
• A fringe benefit – by providing a status symbol – a reward for good service – a sign
of corporate success – part of the pay package.
• Competitive necessity – from a personnel aspect for retaining or obtaining staff.
The most effective method of allocating vehicles is to establish a Fleet Management
Executive Committee. No single person sits in judgement and it’s more impartial.
Eligibility criteria are varied, but six main methods tend to be used:
• Allocation after the employee reaches a breakeven point between an allowance paid
for using a private vehicle versus being allocated a company vehicle.
• The person’s grade or position in the company.
• Salary level criteria.
• Job function i.e. the person’s work situation requires a vehicle.
• Personal status of the person in the company.
• Location of the person in the country.
PRIVATE USE
Most companies allow their employees use of the company vehicle for personal use. It is
important for company policy to indicate the limits which apply to this private use and
any charge back policies. The most general form of private use charges relate to some
form of a cost per kilometre charge.
13. 13
Policy should also control who drives the vehicle other than the employee. Here
insurance considerations should be uppermost in one’s mind. For example your insurance
might only cover the company driver.
VEHICLE SELECTION
Generally speaking a vehicle fleet can be split up as follows;
10% - pure perk, senior management
20% - administrative staff and middle managers
70% - essential users – employees who need a vehicle for their daily work.
The company should concentrate on the essential users, initially, because this is the
largest vehicle group in the fleet. By careful selection, a fleet owner can go a long way
towards minimizing operating costs.
Although some smaller companies go the route of a total free choice, most companies
allocate the selected vehicles according to eligibility criteria.
PURCHASING
Purchasing methods can be rather routine and comparatively straightforward. You
simply go to a dealer, chose the vehicle you want, make the necessary financial
arrangements and, depending on the stock availability, take delivery of the vehicle.
However, a few points mentioned here relate to reducing time, effort and costs.
There has been a tendency for companies using allowance schemes to abdicate all
responsibility in actually buying vehicles. Companies say it is the employee’s problem as
to how he deals with the dealer. However problems do occur, e.g. the best discount is not
obtained or the persons have to wait longer than usual for delivery. This as the unhappy
effect of usually increasing operating costs. Although possibly small in relation to one
vehicle, these losses take on significance if related to the total fleet of vehicles.
Timing the purchase can also affect operating costs. The simplest example would be that
of buying a vehicle in November and having the vehicle technically one year old just two
months later in January. Ultimately this 3 year old vehicle is technically classed as 4 years
old with the resultant increase in depreciation costs, due to the lower resale value.
FINANCING METHODS
Financing methods will always require careful evaluation. The options are numerous and
like any asset being financed, various factors must be taken into account before selecting
the most cost-effective method.
To mention a few factors:
• Paying for use versus ownership
• Optimizing cash flow
• Minimizing/optimizing tax
14. 14
• The inflation hedge
• Company profits
• Balance sheet considerations
• Return On Investment improvement
• The bank interest rates
• Use of residual values and guaranteed buybacks
Furthermore, don’t get locked into thinking that all vehicles must be financed the same
way. Optimize your options to contain costs. Most of all, be flexible, it’s not right for all
vehicles to be on the same kind of finance arrangement if they have differing periods of
usage.
USED VEHICLE MARKETING
Much like buying vehicles the timing of disposal of used vehicles can affect the total cost
of depreciation. In order to optimize matters, try to keep buying and disposal as two
separate transactions. Condition, demand, market share, kilometers and model year all
play their part and must be considered carefully when disposing company vehicles. The
main methods of disposal are:
• Employee sales – it’s clean, there is prompt payment and it’s controllable. But
all too often vehicles are given away at very high discounts.
• Tenders – this usually involves selling a batch of vehicles to the highest bidder. It
is not very efficient in terms of achieving good resale prices.
• Trade Ins – probably used the most. It’s usually the easiest method, yet for this
very reason the best prices are seldom negotiated by the vehicle owner.
• Auctions – The big advantage is the total service offered – collection, paper
work, setting reserves, prompt payment.
REPLACEMENT TIMING
Proper replacement policies in conjunction with the buying and disposal function can
affect at least on third of a fleet’s total operating costs. Unless these matters and the
others are also given proper attention, the setting of replacement policies and their
subsequent implementation will fall far short of any specific company objectives.
A proper policy can produce good cost reductions but its one area where decision making
is the most difficult. The reasons being, that apart from using sound theoretical methods,
one must also consider matters such as time and distance, obsolescence, costs, market
demand, engine size, second hand prices, the economy, stock situations, marketing
locations, model year, second hand values, etc. etc.
A simple approach, like 3 years or 100 000 kms, fixed for all vehicles is not very good.
Each group of vehicles, based on their specific usage, need their own replacement policy.
Standards or guidelines are necessary but be flexible and “manage’ this aspect properly.
INSURANCE
15. 15
Insurance is a never-ending battle with rising costs in respect of premiums and excesses.
There are many options available to the vehicle owner, such as comprehensive insurance
or self insurance. The rates tend to vary considerably and all quotations should be looked
at properly
In the end, it’s your own fleet’s accident record and costs that play havoc with what you
pay. Proper risk management and a proper control programme of inducements and
penalties are essential.
Serious consideration must be given to training employees to drive vehicles properly.
Some companies have reduced accidents by as much as 40% with the resultant cost
reductions in insurance premiums.
It all comes down to having a sound Fleet Safety programme
MAINTENANCE
Labour rates are as high. Parts prices escalate continually. Strict controls on this aspect of
overall operating costs are very important. Today, one is faced with various options -
paying as you go – using a maintenance plan which fixes your costs over a given period
and distance – or using a maintenance management programme, where these costs are
managed for a monthly fee per vehicle per month.
Assuming that you know your present costs, it is not difficult to ascertain the best option
for a particular group of vehicle vehicles, i.e. to do it yourself or to use an outside service
provider.
ADMINISTRATION AND EXPENSE CONTROL
Good administration is the result of producing and working within the framework of a
well thought out and documented vehicle policy
The major areas of authority that should be given to a fleet manager are given below:
• The main authority and source of fleet management recommendations and
operations.
• The only manager able to authorize an order for vehicle purchase.
• The only manager able to authorize major mechanical repairs and major collision
damage repairs.
• If vehicles are financed, the sole company contact and final authority on money spent
by the company.
• The final authority on the sale of used vehicles, whoever the buyer.
• The primary management source concerning recommendations for the fleet’s
operations.
• The manager with the main responsibility for the efficient use of the company’s fleet
management information system.
VEHICLE ASSET MANAGEMENT
16. 16
One of the most important tasks in fleet management is to establish the correct number of
vehicles needed for the work to be done in the organisation and to ensure that the correct
vehicles are selected for each type of job in the organisation. The overall objective is to optimise
the number of vehicles required to support the company’s business objectives and to ensure that
they used effectively.
The utilisation evaluation basically uses the age of the vehicles and kilometres driven to
date. There is a method to do this in general fleet management business disciplines
based on targeted averages, pre-set minimums and maximums by vehicle type. The
utilisation exercise has been based on normal fleet operations. This exercise can only be
done effectively once the full procedures and fleet management systems are fully
implemented.
The general fleet management procedures and policies that need to be adopted to
manage these processes are explained in detail in the Vehicle Asset Management chapter.
With reference to the requirement to analyse user needs and vehicle composition against
business needs.
In all that you do with your fleet, be professional. A vehicle manager must be an active,
working manager, committee member, continually solving problems in the field as they
rise.
To do this, you must know and understand the principles of vehicle management, not
just how to buy vehicles at a discount.
17. CHAPTER 2
ANALYZING A FLEET’S SITUATION AND REQUIREMENTS
It will always be necessary to do regular internal fleet audits and operational analyses
of the three core areas of fleet management, before you are able to decide on what
policies to set or whether existing policies are adequate.
A fleet audit should be done every six months. It might not be necessary to cover
every area of the fleet’s operations each time an audit is done. However, with
changing economic situations, new vehicle launches, legislation changes and internal
changes, an assessment must be made on current fleet policies affected by these
changes.
The depth and complexity of this task depends on the size of a fleet and on the level
of its decentralization. Once you have done your internal analysis, it should be
benchmarked against correct fleet management concepts and techniques.
It is important for you to decide what data and facts need to be analysed and known
before you review a current fleet policy. Remember the ultimate policy will have a
direct bearing on the vehicle drivers and in the end, on the fleet’s total annual
operating costs.
A FLEET OPERATIONS SURVEY
The first thing you should do is a general vehicle operations survey. Then compare
your answers to your current vehicle management policy and decide where your
policy is not covering the pertinent issues.
Use the following checklist as your guide to do this. No doubt these questions will
trigger off thoughts and queries related to your own specific operations. So be
flexible and get down on paper your present operational procedures, controls and
management thinking. Then analyse your present operations against the questions
that follow on these major areas of fleet management.
THE QUESTIONS
1. Do I have an accurate count of my fleet vehicles by location?
2. Is my asset register properly maintained with purchases, sales, depreciation,
dates and values properly recorded?
3. Are specific fleet management responsibilities allocated at the different
Divisional/Regional levels?
4. Do I have a fleet management executive committee and is it operating
effectively?
5. Do I base vehicle selection on specific criteria e.g. –
Purchase price
Depreciation
18. 18
Projected resale value
Maintenance cost
Fuel consumption
Overall costs/ kilometre cost/ TCO
6. Am I aware that manufacturers increase prices on a regular basis? How does
this affect vehicle selection and operating costs?
7. All manufacturers offer some form of service plans, maintenance plans and
maintenance management programmes. Check your current maintenance
programmes against them.
• Fleet card for petrol purchases
• Fleet card for maintenance
• National coverage
• Maintenance plans for all vehicles
• Managed maintenance plans available
• Available at all franchised dealers
• Service manual orientated
• Authority levels required and set to your specific amounts
• Petrol cost control systems available
• Single account for VAT and accounting purposes
8. Used Vehicle Marketing if done properly reduces the cost of depreciation
which is nearly 30% of total costs. Ask yourself:
• Do I sell vehicles to my drivers?
• Do I set realistic reserve prices?
• Do I know that trading in vehicles is not always the best option?
• Do I insure the residual value projected for my vehicles?
• Do I use vehicle condition reports to optimise my resale values?
9. Proper financing is a major concern when running a fleet. There are many
options that need to be considered. Check the following to ensure you have
considered the main points :
• Cash purchasing reduces working capital in my business
• I have considered off-balance sheet financing as an option
• I have vehicleefully evaluated the usual financial options such as:
o Instalment sale
o Leasing
o Operating rentals
o Full maintenance lease
• I have used a net present value method to make sound financing
decisions
• I understand the VAT implication of each option for acquisition and
disposal.
• I make use of final balloon payments related to projected residual values
to control cash flows.
• If I give vehicle allowances, I control and negotiate a good interest rate
for my drivers
• My selected financing periods relate to my replacement policy
• I know when to choose fixed or linked rates
19. 19
10. Insurance for business vehicles is related to risk management and a well co-
ordinated safety management and accident control programme. Do I have
this aspect of my fleet under proper control?
11. When allocating vehicles to employees – is it tied into vehicle selection and
the company’s hierarchical structure? Am I using sound fleet management
principles to make these decisions? Do I carefully consider the needs to my
“Essential Users”?
12. Do I understand the correct theory of when to replace my vehicles to obtain
the best prices?
13. Properly controlled fleet policies need specific management reports that
relate costs to a costs/ kilometre figure. Fleet card management systems
provide some of these figures. The FleetCUBE online fleet management
information system provides all the information you need.
• Do I distribute the reports to managers?
• Do I allocate authority and responsibility?
• Do I track trends in the major cost areas?
• Have I allocated driver responsibilities?
If I have an internal system, do I have to rely on the “budget” method of
figures in Rands or can I get the appropriate costs in costs/ kilometre?
Am I working with preset, budgeted operating costs in terms of costs/
kilometre?
14. Do I have a well-considered, written and distributed fleet policy document?
Are authorities and responsibilities clearly defined? Are all these major areas
of vehicle management properly covered in the fleet policy?
If you do this on a regular basis, it is possible to keep a fleet under proper financial
control. It will also ensure that the daily operations and drivers are properly
controlled. It will ensure that the fleet operations are meeting the set targets, KPIs
and benchmarks.
20. 20
DOING A DETAILED VEHICLE MANAGEMENT SURVEY
The FLEET SURVEY QUESTIONNAIRE shown below is a more detailed fleet
operational survey. This is the survey that needs to be done at least once a year. It is
quite detailed and covers the many different areas that should be analysed in a fleet
operation.
Use it as a guide for your own vehicle management audit programme. In order to
evaluate a fleet’s “efficiency factor” you should decide which of the key questions
out of the survey document are appropriate to your fleet operations. Then use the
‘TEN POINT’ system to analyse your answers. Remember that each answer should
be scored on a 10 to 1 basis, where 10 points are given for the best situation and 1
point for the worst situation.
INTERNAL AUDIT QUESTIONNAIRE
FLEET POLICY:
Is the fleet policy in written form?
Yes No
Is it available to all employees?
Yes No
Does it form part of the company’s Policy and procedures manual?
Yes No
Who originates amendments / changes to the policy?
...........................................................................................................................................
Do you have a specific review cycle?
Yes No
Do you have a Company Vehicle Committee?
Yes No
Who finally approves the policy and any amendments thereto?
...........................................................................................................................................
1. ELIGIBILITY:
Who decides on eligibility?
Yes No
Do you have different categories of eligibility?
Yes No
Does a standard yardstick apply, e.g. job grading, etc.,.?
Yes No
Are employees aware of their job gradings?
Yes No
How often is eligibility reviewed?
...........................................................................................................................................
If you do have a standard yardstick, are there any exceptions?
Yes No
2. SELECTION:
Do you allow employees a choice of vehicles?
Yes No
Are they restricted by:
Models on the sector list?
Yes No
21. 21
Retail price?
Yes No
Any other criteria?
Yes No
If you have a standard list of vehicles, which criteria do you apply to select vehicle?
...........................................................................................................................................
How often do you review or update the list?
...........................................................................................................................................
3. BENEFITS TO STAFF:
What are the conditions regarding the use of the vehicle?
….......................................................................................................................................
Is full private usage allowed?
Yes No
Is private usage controlled?
Yes No
If yes, explain how? .....
……...............................................................................................................................
…………………………………………………………………………………………….
Are employees / drivers entitled to buy vehicles at replacement?
Yes No
Are there any restrictions on the number of fleet vehicles an employee may purchase?
Yes No
What costs are the drivers liable for?
...................................................................................................................................................................
.…………...................................................................................................
……………………………………………………………………………………………
……………………………………………………………………………………………
FLEET OPERATION:
4. REPLACEMENT CYCLE
When do you normally replace vehicles?
..................................……..................................................................................................
After a specified time?
Yes No
At a predetermined distance?
Yes No
A combination of time / distance?
Yes No
Any other methods?
.........................................……...........................................................................................
How do you establish replacement?
................................................
….......................................................................................................................................................
………................................................................
Time?
...................................................................................................................................................................
...................................................………….................................................
Distance?
22. 22
...................................................................................................................................................................
.................................................................…………...................................
Other yardsticks?
...................................................................................................................................................................
...............................................................................………….....................
Is flexibility applied to the replacement yardsticks?
Yes No
If yes, who takes the decision?
...........................................................................................................................................
What would the reasons for deviation from the policy normally be?
...................................................................................................................................................................
.............................................................................................………….......
5. ACQUISITION:
Who gives the authorization to purchase a vehicle?
......................................................................................................................…….............
Is this in writing on a standard format?
Yes No
Who buys new vehicles?
.............................................................................................................................…….......
Does this person have free choice regarding dealers / suppliers?
Yes No
What criteria are applied to selecting dealers?
....................................................................................................................................……
How many dealers do you currently buy from?
.......................................................................................................................................
Is the list of supplying dealers ever reviewed?
Yes No
Are you registered as a fleet owner?
Yes No
Do you know what discounts you are entitled to?
Yes No
What discounts do you currently receive?
...........................................................................................................................................
…………………………………………………………………………………………….
Do you obtain buy-backs from dealers?
Yes No
If yes, how are the buy-back percentages determined?
...........................................................................................................................................
What buy-backs are you currently enjoying?
...........................................................................................................................................
Give a few examples?
..................................................................................................................................................................
..................................................................................................................................................................
.............................................................................................................…………….
………………………………………………………………………..
6. INSURANCE
Which insurance brokers do you make use of?
23. 23
...........................................................................................................................................
What type of insurance cover do you have? Describe in detail.
..................................................................................................................................................................
..................................................................................................................................................................
.............................................................................................................…………….
………………………………………………………………………..
Have you considered alternatives?
Yes No
What were your costs for the previous financial year?
...........................................................................................................................................
Premiums?
...........................................................................................................................................
Excesses?
...........................................................................................................................................
Other?
...........................................................................................................................................
Were these higher than the year before?
Yes No
By what percentage?
...........................................................................................................................................
Any idea what your accident rate is?
Yes No
Is it improving or deteriorating?
Improving Deteriorating
What actions are you taking to reduce the accident rate?
..................................................................................................................................................................
..................................................................................................................................................................
..............................................................
7. MAINTENANCE
Do you have your own workshop?
Yes No
If yes, how many people do you employ in the workshop?
...........................................................................................................................................
What is your annual salary bill?
...........................................................................................................................................
What is the value of the building and equipment?
...........................................................................................................................................
What is the value of the parts; oil and consumable stock?
...........................................................................................................................................
Any idea what the annual stock loss is?
Yes No
Do you insist that vehicles be serviced at franchised dealers?
Yes No
If no, why not?
...........................................................................................................................................
Then where are the vehicles serviced?
...........................................................................................................................................
Are the vehicles serviced in accordance with the manufacturer specifications?
Yes No
Do you use franchised dealers?
Yes No
24. 24
On what basis do you select dealers?
...........................................................................................................................................
What was your maintenance expenditure for the previous financial year?
...........................................................................................................................................
What was the percentage increase on the year before?
...........................................................................................................................................
Who controls maintenance expenses?
...........................................................................................................................................
How do you purchase maintenance?
...........................................................................................................................................
Orders from the fleet department?
...........................................................................................................................................
Orders from the buying department?
...........................................................................................................................................
Fleet card?
...........................................................................................................................................
Others?
...........................................................................................................................................
Who authorizes payment for invoices?
...........................................................................................................................................
Is the person capable of identifying warranty work?
Yes No
Who pursues policy claims?
...........................................................................................................................................
Are major expenses specifically investigated and alternatives considered?
Yes No
Are costs allocated by vehicles?
Yes No
By cost center?
Yes No
Are managers involved in maintenance control?
Yes No
Do you utilize fleet card reports to assist you?
Yes No
Are cost trends established and analyzed?
Yes No
Are you making use of maintenance contracts?
Yes No
If yes, from whom? (Probe: details, conditions, cost, etc.)
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
If no, why not?
...........................................................................................................................................
Do you make use of extended warranties?
Yes No
If yes, from whom?
...........................................................................................................................................
If no, why not?
...........................................................................................................................................
Do you use Full Maintenance Leasing?
25. 25
Yes No
If yes, from whom?
...........................................................................................................................................
If no, why not?
...........................................................................................................................................
Have you ever considered maintenance contracts, extended warranties or full maintenance
leasing?
Yes No
Do you plan to reconsider shortly?
Yes No
8. DISPOSAL OF USED VEHICLES
Who is responsible for the disposal of used vehicles?
...........................................................................................................................................
What percentage of his time is spent on selling vehicles?
...........................................................................................................................................
How many vehicles are sold per month?
...........................................................................................................................................
Who does this person report to?
...........................................................................................................................................
What percentage of used vehicles are sold to:
Staff?
...........................................................................................................................................
Dealers?
...........................................................................................................................................
Other?
...........................................................................................................................................
Who?
...........................................................................................................................................
If sold to dealers, who many are regular buyers?
...........................................................................................................................................
How many quotes are obtained?
...........................................................................................................................................
Are vehicles examined on your premises?
Yes No
If not, who takes it to the dealers for appraisal?
...........................................................................................................................................
Are vehicles ever traded in on new vehicles?
Yes No
What percentage of vehicles is traded in?
...........................................................................................................................................
How is the selling prices set:
If sold to staff?
...........................................................................................................................................
If sold to dealers?
...........................................................................................................................................
If sold to others?
...........................................................................................................................................
Who approves the price?
...........................................................................................................................................
Does the person selling the vehicle or the person approving the price know the company’s
book value?
26. 26
Yes No
Are any other price preference used, e.g. The used market pricing guide
Yes No
Who completes the change of ownership forms?
...........................................................................................................................................
How soon after the sale are these submitted to the authorities?
...........................................................................................................................................
When are these handed to the buyer?
...........................................................................................................................................
Who prepares the invoice?
...........................................................................................................................................
How must payment by made by the buyer?
...........................................................................................................................................
Do you ever experience problems with payment?
Yes No
Are vehicles always sold:
As is?
Yes No
With RWC?
Yes No
On average, how long is vehicle stored before being sold?
...........................................................................................................................................
Do you have cover/safe parking for vehicles or sale?
Yes No
Do you know what the daily/weekly/monthly interest and storage cost is?
Yes No
Are the vehicles awaiting sale comprehensively insured?
Yes No
Are you certain that these vehicles are not used without permission?
Yes No
9. FINANCE
How are the vehicle financed?
...........................................................................................................................................
Any specific reason for using this method?
...........................................................................................................................................
Benefits?
...........................................................................................................................................
Cash Flow?
...........................................................................................................................................
Other?
...........................................................................................................................................
Have you considered alternatives?
...........................................................................................................................................
Which financial institution are you suing?
..........................................................................................................................................
Any specific reason why?
...........................................................................................................................................
What is the original capital cost of your fleet?
...........................................................................................................................................
What is the current book value?
27. 27
...........................................................................................................................................
What is the monthly depreciation?
...........................................................................................................................................
What is the monthly interest charge?
...........................................................................................................................................
10. ADMINISTRATION
Who manages the fleet operation?
...........................................................................................................................................
How many people are directly involved in fleet management?
...........................................................................................................................................
Annual salary bill for these employees?
...........................................................................................................................................
Do you have in-house computer systems for control?
...........................................................................................................................................
Is control centralized or decentralized?
...........................................................................................................................................
Who is responsible for license renewals?
...........................................................................................................................................
Who receives license renewals?
...........................................................................................................................................
Where registration documents are kept, and are these properly controlled?
...........................................................................................................................................
Who controls traffic fines?
...........................................................................................................................................
Are procedures relating to fines and summonses clear?
...........................................................................................................................................
Who provides guidelines for annual budgets?
...........................................................................................................................................
Who prepares and controls annual budgets?
...........................................................................................................................................
28. 28
INTERNAL VEHICLE MANAGEMENT AUDITS
This is another set of questions that can be used on a quarterly basis to create reports
for senior management and provide information to show that your fleet is within
budgeted operating procedures and costs.
NEW VEHICLE PURCHASING:
YOUR
COMPANY’S
GRADE -
10 TO 1 POINTS
Trained vehicle purchasing specialist
Contacts to purchase vehicles country-wide
Top discounts available from all dealers
Knowledge of pending price increases
Vehicles always delivered when ordered
Dealers deliver to your company nation-wide
Advance knowledge of changed vehicle specifications
Easy, simple administration and ordering system
Efficient, controlled hand-over to drivers
MAINTENANCE MANAGEMENT
Maintenance payments are validated through a fleet card
All repairs and services are pre-authorised
Vehicles are properly managed on a national level
Special rental company rates are available when vehicles
break down
A driver’s maintenance instruction manual is available
Servicing frequencies correctly controlled
A simple system to claim VAT inputs is available
END OF VEHICLE LIFE PROCEDURES:
Driver option to purchase the vehicle
Prices are predetermined
The vehicle condition is properly assessed
The condition report is signed by the driver
Used vehicle market prices are constantly evaluated
No resale risk exists
No opportunity for fraud exists
No risk of non-payment exists
FLEET MANAGEMENT PROCEDURES:
Costs are controlled with accurately projected residuals
Budgeting costs are fixed for vehicle’s life
Vehicle kilometres are constantly monitored
Expert advice is available on internal fleet management
controls
enior fleet management control on all fleet operations
Vehicle selection advice from the experts
29. 29
arious programmes available for different operations
Excellent fleet management and financial reports
Proper replacement timing ensures optimum operating costs
Proper accident reporting procedures
Properly controlled licensing and registration
Properly managed utilisation and availability
31. 31
CHAPTER 3
THE IMPORTANCE OF PROPER VEHICLE SELECTION
This is probable the most important area of vehicle management. It usually takes
more management time than anything else when the rules related to vehicle selection
are being set.
The information covered in this chapter will help you to –
• Understand the importance of selecting the right vehicles for your
fleet.
• Realise that although this is an emotional issue, the proper way to do
this should be based on technical, operational issues.
• Calculate the technical issues related to what is called TOTAL LIFE
TIME OPERATING COSTS (TCO).
• Evaluate the main criteria that should be looked at when selection
decisions are made.
Because vehicles are such a personal issue with drivers, it is not unusual to find that it also is
quite an emotional issue. This is usually because a vehicle tends to be a symbol of the driver’s
status in a company. Vehicle selection for company vehicles has always been an emotional
problem and it has caused many a corporate executive more trouble than he ever considered
necessary.
The permutations are obviously endless. A lot depends on the executives involved in the
decision making process and whether they are properly constituted as an executive vehicle
management committee. These executives also need to have specific technical input from
their own vehicle manager or from an outside vehicle management source.
The biggest problem is to be able to make selection a more technical rather than just an
emotional issue. With Light commercial vehicles, it is obviously a bit easier because these
vehicles are selected on the technical specifications more than anything else.
There is a KEY ISSUE here that must first be considered, more than anything else. This
relates to the TOTAL LIFE TIME OPERATING COSTS for the particular vehicle. These
costs should always be calculated before looking at other issues related to vehicle selection.
These are the total costs in money terms (depreciation, finance, serving, fuel and insurance
etc.) that a vehicle will cost over a given period of kilometres and months of usage.
These costs are the base on which to make decisions. Doing these calculations is not
difficult. However, they do require input from a number of business related areas in order to
do them properly. To give you some idea of what to consider, look at these matters: -
• The vehicle’s net purchase price
• The period / kilometres of usage
• The type of usage, e.g., off road
• The projected resale value
32. 32
• The current interest rates applicable to the money being used
• The fuel consumption
• The maintenance / servicing costs
It is not a difficult calculation, but you need to get accurate information to do this costing
exercise properly.
You can log onto the website www.fleetcube.com to access the various fleet
management calculators that you are likely to needs. You can also register to use
FleetCUBE Online and get the most up to date TCO calculations and every vehicle
in the South African market.
Before looking at the actual total life time operating cost calculations there are some very
important selection principles that need to be considered. These matters are discussed in
more detail now. Read them carefully and if necessary, compare them to how you are
currently selecting your vehicles.
A VERY WIDE SELECTION OF VEHICLES
There are more vehicles and Light commercial vehicles being offered to the fleet owner
today than ever before. The local manufacturers will always be there offering their various
models and variants. In reality however, they just seem to complicate issues like vehicle
selection.
In simple terms, as the selection gets wider, the decision making process on actual selection
gets more complicated. Take a 1600 cc engined range of vehicles for example and you will
often find that their prices vary considerably depending on the manufacturer. Some times by
as much as 30%.
So, apart from the level of vehicle being selected e.g. a 1600 cc, you need to look at
popularity, resale values, maintenance costs, features, accessories, fuel consumption, finance
plans, company image and overall operating costs. From a totally operating cost point of
view, the vehicle with the lowest cents per kilometre operating costs, over its life should be
the best buy, all things being equal!
The problem is that all things are not equal and one needs a fair amount of vehicle
management “know how” in order to make the best decisions. Another general
complication is the fact that a normal fleet of vehicles can be split into four segments in the
company. These are the executive vehicles for senior managers, the vehicles for middle
managers, and then the essential user vehicles that can go right down to entry level models,
and finally commercial vehicles. See box below for the approximate percentage splits.
10% Senior Managers
20% Middle Managers
65% Essential Users
5% Entry level vehicles
Light commercial vehicles percentage can be
split at various levels, but on average fleets
they represent about 28% of the fleet.
33. 33
It makes good sense to apply different selection criteria for each personnel level in the fleet.
The main reason is that the people in each level are given vehicles for very different reasons.
Some people in the company need vehicles for their daily work.
Others get vehicles because of their position in the company. Others need vehicles to move
supplies or provide technical support to the company’s customers. There are many
variations and every company, within their industry segment will have differing needs.
Finally there will be executives who are given vehicles as a pure ‘perk’.
CORPORATE EMPLOYMENT GRADES
The hierarchy of the company is usually the main factor in selecting the level of vehicle for
the employee. Usually this goes hand in hand with the type of company business. Most
similar businesses e.g. the banks tend to agree on some sort of de facto criteria that sets the
level of vehicle. If for no other reason this tends to limit job-hopping. The Peromnes or
Hay job grading systems are the most commonly used grading methods.
PRICE LEVEL:
Within the job grades, it is usual to select certain vehicle price levels that obviously cascade
downwards from the Managing Director to the junior representative or technician.
However, it is not unusual for companies to run out of price levels in relation to vehicle
models. This can cause real confusion because the Human Resources division is at odds with
the vehicles available in the market.
ENGINE SIZE:
For some reason, vehicle owners always tended to tie price and engine size together. A few
years ago, when there were fairly well segmented vehicle/engine/price categories, this wasn’t
a problem. Today, it’s a very different story with the significant price differentials between
vehicles with similar engine size. You have to be quite careful in today’s market to make cost
effective decisions.
THE BENCHMARK VEHICLE AND/OR PRICE
Many companies fall back on this method of selection for all levels of drivers. In some
respect, it is an easy way out, and most of the time it keeps most employees satisfied. It
certainly is an acceptable method if the company needs to give “equal” opportunity to all
vehicle suppliers.
34. 34
The main problem is how to control the constant problem of price increases. What is an
acceptable situation today can be completely upset if one or two manufacturers suddenly
raise their prices. The reaction of the average employee could be something like this “Today I
can buy a certain vehicle, then delivery is delayed, suddenly a price increase moves the vehicle above the bench
mark and I am a very unhappy employee.”
The interesting thing that seems to happen when this selection method is used, especially in
the essential user groups, is that most of the vehicles selected tend to be the same model and
make. The reason here is word of mouth recommendations amongst the employees. So
even though the company thinks it is in control, it actually is not so. If you’re only worried
about price and hierarchy levels, it might work. The truth is, you will find that your total
vehicle operating costs are usually above the average.
A fleet of 200 vehicles costs about R22 million a year to operate. (2011.) Even if you are
only 5% out of line it will be costing you some R1 100 000 a year more than necessary to
operate your vehicle fleet.
THE OPERATING COST METHOD
In Europe and the USA, vehicle owners are very conscious of vehicle costs. The benchmark
system is seldom used other than at senior management levels. The reason is simple; costs
are not effectively controlled when this method of selection is used. Where EVA, ROI,
ROA, share prices, EPS etc. are important, there are few companies in these countries that
allow vehicle costs to run out of control.
Their answer is that once the level of vehicle has been determined, vehicles have to be
selected based on total operating costs. The common denominator is normally costs per
kilometre.
All cost elements should be included and assessed. These are fuel consumption, maintenance
and service, tyres, and actual depreciation, which is the difference between the purchase price
and the eventual resale price. Lastly, interest costs related to bank rates or the company’s
own cost of money and insurance. These total costs are then divided by the total kilometres
to be driven during the period of usage in the vehicle.
The end result is that the company will have the correct facts to compare vehicles and
eventually select three or four models for a particular job grade or employee. The concept of
choice still has to be applied, but at the same time, operating costs are under proper control.
This is undoubtedly the best method to use for proper vehicle management, especially in the
essential user and middle management groups. At the executive level, one has to accept that
status and image often override operating cost type of decisions. However, only some 5% of
vehicles fall into this category, so generally speaking, the decision-makers don’t have a
psychological problem with the purchase of few vehicles at the executive vehicle price level.
A SELECTION CRITERIA SURVEY
FleetCUBE carried out a survey using similar questions to those used in the US. This
research group was 120 large vehicle owners. They were then asked to give each factor a
level of importance on a scale of one to ten, where ten was considered to be the most
important. The result is shown in the table on the next page
35. 35
Selection Criteria
1. Initial cost
2. Repair record
3. Depreciation/resale value
4. Job suitability
5. Fuel economy
6. Safety record and serviceability
7. Warranty programme
8. Insurance costs
9. Drivers preference
10. Company image
11. Order/delivery
12. Administrative ease
13. Fringe benefit value
14. Country where manufactured
Rating
8.2
7.42
7.42
7.36
7.18
7.09
6.15
5.24
5.15
5.12
4.7
4.3
3.61
3.3
It makes very interesting reading and you should take a few moments to look at how the
various factors correlate to your own ideas or methods on vehicle selection.
A few thoughts on the results are worth while noting - Top of the list was price and this ties
in with the use of aligning job grades to select the level of vehicles. Depreciation and
maintenance costs were second, even though depreciation represents about 30% of total
costs and maintenance only about 15%.
Safety features only came sixth, which is surprising considering the high level of accidents in
fleets. In the US where accidents are about 12 per 100 vehicles, safety is actually in SECOND
position in a similar survey.
Fuel economy came fifth, which was also surprising when one considers the high cost of fuel.
However, the facts speak for themselves and should be used as a guideline for evaluating
your own vehicle selection criteria. The interesting fact however, is that the top five or six
items all relate to operating costs.
OTHER IMPORTANT MATTERS
Let’s consider a number of other selection matters from a slightly different angle. You can
use these to add to your overall selection criteria. These points are all very important and if
used objectively will help make selection a little easier. They also need to be considered when
doing the Total Lifetime Costs calculations.
36. 36
1. ECONOMY
Capital Cost
Residual Value
Service Availability
Tyre costs
Fuel costs
Insurance
Maintenance costs
-it affects depreciation costs
-don’t purchase base line models
-choose popular models to get better residual
values
-a good dealer network is essential
-kilometres obtainable front and rear
-about 70% of variable costs
-affects operating costs
-vary considerably but can be fixed with
maintenance plans
2. RELIABILITY -breakdowns result in higher costs to the
company such as downtime
3. IMAGE -corporate identity is important
4. REWARDS &
MOTIVATION
-image for the user. A higher level vehicle for the
top
performer
5. UTILITY -size related to usage
6. BODY TYPE -resale value and usage are offered
7. TRANSMISSION -auto or manual transmission. Selection depends
on usage in town and country.
8. ACCESSORIES -set down the guidelines.
SOME MORE MATTERS THAT YOU NEED TO REVIEW ON A REGULAR
BASIS
MARKET TRENDS
Be aware of market trends and new vehicles being launched on the market. If necessary
phone the dealer or manufacturer and ask what is happening. Keep in mind that the average
fleet vehicle is kept for 3 to 4 years and there is a need to look well ahead. You do not want
to be left with vehicles that have lost their resale value.
FUTURE INTERNAL PLANNING
Future plans and development need to be considered because these often affect personnel
requirements. It is not unusual to find a carefully worked out a selection policy in pieces
even before it is announced because no one mentioned that the Sales Division was about to
introduce a new category of representatives.
STATISTICS
These can be the bane of many a vehicle manager’s life. Statistics are either good or bad
depending on their source and ultimate interpretation. However, they do serve a useful
purpose in being able to compare and quantify costs, so use them with discretion.
Remember you are operating vehicles under corporate conditions not as a private owner.
Different operating conditions and regions can also cause considerable variations in
operating costs.
37. 37
PRICE AND DISCOUNT
We all live in an economic environment that leads to price increases over a period of time.
Not much can be done about constantly increasing new vehicle prices. The size of vehicle
selected can be reduced but there is obviously a point where practical operating
considerations make this type of decision somewhat limited.
On the subject of discounts, many fleet owners or corporate buyers base the selection of a
vehicle on the discount being offered. The discount is often as little as an extra one percent.
For your own benefit, work out what this would be based on the vehicle’s price. Over three
years this might, at the most work out to a small saving of about 0,6% of the total monthly
operating costs. The point is that the time and effort is probably hardly worth the so-called
saving.
BODY SIZE
The size and type of body will depend on operating requirements and whether two door,
four doors or five doors, hatchback sedan and station wagon, they all have a place in any
vehicle. Engine size is not the criteria for body size.
MODEL LINE
This is an aspect not often considered in the selection process, i.e. the different models
within a size of vehicle. In any model line up there are various engine sizes and specification
standards and each vehicle has its place in the market. New vehicle sales and second hand
values are perhaps the most appropriate methods of assessing the best vehicles for the fleet.
As a general rule, the top and middle line vehicles to be the best selection for vehicles and
apart from anything else, drivers are happier and will therefore take more vehiclee in
maintaining their vehicles.
CHOICE OF VEHICLE BY THE DRIVER
Psychologically it has been proven over and over again that allowing a choice of vehicles, no
matter how limited, is always the best decision. Factors such as image, prestige and morale
play their part here and should not be ignored.
FUEL
Today of course, no selection process would be complete without looking at fuel
consumption. This is a subject that is argued back and forth constantly with everyone
presenting their own ideas as to how to view the matter. Depending on whether it’s the
manufacturer, a journal reporting on tests, the advertiser, the private user or the vehicle user,
each one will produce different results in terms of fuel consumption. So who is right? They
all are because each one drives the vehicle under different conditions.
With fuel costs at least 35% of total operating costs, there is a definite need to look at this
aspect carefully because in any vehicle range, fuel consumption will vary considerably. So be
38. 38
objective, don’t be gullible because in the long run it is usually the driver that has the greatest
effect on fuel consumption.
From a selection point of view, take a few moments to work out what only one litre of fuel
costs over the lifetime of a vehicle. You will be surprised how much just even two extra
litres of fuel used will cost your fleet. Multiply this figure by the number of vehicles in your
fleet and you will get an answer that could well be quite a significant cost factor.
The other aspects that should be considered are things related to warranties, parts prices and
availability, dealer network, manufacturer ability and quality control, rust proofing, servicing
intervals and costs, diesel engines etc.
However, in the long run it is TOTAL OPERATING COST expressed in costs/ kilometre
that will show whether good or bad selection criteria have been used.
CALCULATING OPERATING COSTS
Here is a final exercise for you to do. Work out the total lifetime operating cost of a vehicle
in rands and in costs/ kilometre. It is not a difficult exercise, but it needs to be worked out
properly by taking all the facts into account that affect a vehicles operation in your corporate
environment. Answers are given for the calculation. Your own answers for the second
example should be very close, if not the same.
39. 39
(REFER TO THE VARIOUS EXPLANATIONS GIVEN BELOW WHEN
DOING THESE CALCULATIONS)
The facts related to doing this calculation are:
Vehicle : 1600cc four-door sedan
Vehicle Price : R200 000.00 (Including VAT)
Discount 4%
Usage : 4 years / 120 000 kms
Fuel : 10l / 100 kms
Fuel Price : R10
R+M : R900.00 p.m. (including tyres)
Interest Rate : 11%
Before doing the calculation, you need to work out:
A resale value – to be used as a RV
A net purchase price
The fuel cost in rands
To do this example now, please follow each step:
Net Price : R192 0.00
Resale Value : Over 4 years will be 45% of the RETAIL PRICE – R90 00.00
Fuel Calculation : 10 Litres x 2500 monthly kms x R10
100
= R2 500.00 per month
Do the finance calculation now (in advance) using your HP calculator:
N : = 48
I : = 11
PV : = -R192 000.00 .ENTER THE AMOUNT THEN PRESS
THE+/- KEY
FV : = R 90 000.00
PMT : = R 3 461.24
Add Fuel : = R 2 500.00
Add R+M : = R 900.00
TOTAL COST := R6 861.24 per month
1. To work out the costs/ kilometre:
R6 861.24 DIVIDED BY 2 500 (monthly kms) = R2.74/ kilometre
2. To work out the TCO: R6 861.24 x 48 months = R329339.68
EXPLANATIONS AND NOTES TO THE ABOVE CALCULATION
Lifetime costs – With this cost, you now in a position to compare this vehicle with other
similar vehicles.
Vehicle price –this should be the retail price for the vehicle
Discount – this is the current vehicle discount you would be able to obtain from the
manufacturer
Usage – this will be based on how long the vehicle will be used before it is sold. It relates to
the replacement policy.
40. 40
Fuel --- this should be the actual fuel consumption or the figure obtained from the
manufacturer.
R+M – the costs related to services and repairs during the in service life of the vehicle. These
could be your actual costs or the projected costs, both should be averaged out as a monthly
amount.
Interest rate is the rate being charged to by your bank, if you are financing the vehicle or the
rate of interest your company is earning at the bank if you are using internal funds to pay
cash for the vehicle.
Resale Value – this can be based on what you have recently sold a similar vehicle for, or a
projected amount based on one of the resale value guides. Someone once said, “Most vehicle
owners forget that when you buy a new vehicle, you automatically put yourself into the used
vehicle market and have to suffer all the vagaries and consequences of being exposed to it.”
We can vouch for the fact that most vehicle owners fall into this trap.
Net Price – this is the retail price minus the discount.
The FleetCUBE website and FleetCUBE Online
You are be able to do these TCO calculations on our website – www.fleetcube.com. Just
look for CALCULATORS under the menu and then select OPERATING COSTS. You can
compare up to four vehicles at a time.
You can also register to use our Fleet Management Information System at www. You
will need to be a registered user to have access to the TCO calculators. These calculators use
the very latest information on maintenance costs and resale values. This ensures that the
TCOs for the vehicles you select and the usage criteria you select, give you the most accurate
TCO in the South African market.
41. CHAPTER 4
PURCHASING VEHICLES
Purchasing vehicles is an area of fleet management that has always created a tremendous amount
of discussion. In fact, to make good purchasing decisions requires attention to almost every
other area of fleet management. Matters such as – model year, discounts, timing, dealer selection,
depreciation costs, dealer service and delivery timing, all have to come into the equation.
The information covered in this chapter will help you to –
• Understand the main factors that you need to think about and apply
when making purchase decisions
• Know that TIMING the purchase properly during a year has a major
impact on the depreciation costs of a vehicle
• Be able to calculate the impact of these costs
• Create purchasing check lists for your fleet and also for dealers
.
DEPRECIATION MANAGEMENT
The market itself actually forces companies into set buying patterns. However, there is no
reason why 10-year-old methods still have to be used in today’s volatile market. A little bit of
innovative thinking can create many new methods when the time comes to purchase vehicles.
The whole process needs to be constantly refined in order to take advantage of present
circumstances in the market.
Probably the most important point is related to the TIMING of the purchase. This is
important because of the impact it has on depreciation costs. Remember that depreciation is
the cost difference between the vehicles purchase price and its eventual resale price. It is not
‘financial accounting’ depreciation. In vehicle management terms this is the cost that generally
needs the most attention, simply because it has the most direct effect on your total vehicle
costs. Proper “depreciation management” is of the most important areas of vehicle
management.
On average, the cost of depreciation is one third of a vehicles total operating costs. So any
decisions you make to reduce this cost has a direct impact on your vehicle’s overall operating
cost and its costs per kilometre costs efficiency factor.
THE MODEL YEAR
This is an important concept to understand. The “model” year is a twelve-month period that
usually runs from 1 January to 31 December. The model year will have different time frames
in other countries but theses principles still apply. For example, let’s take the year 2011. No
42. 42
matter when you buy a vehicle during 2011, it will become ONE model year old on the 1st
Jan
2012. So even if the vehicle is bought in November 2011, on 1st
January 2012, it will ONE
model year old.
The resale value is obviously affected by “how many model years the vehicle has been in use.
This in turn affects the total cost of depreciation because the “older” it is, the lower the resale
value.
On average a medium size vehicle will depreciate as follows:
1st
year 25% }
2nd
year 10% } based on a usage of
3rd
year 8% } 4 years and 120 000 kms
4th
year 8% }
Obviously this will vary based on the actual vehicle and its usage. There often is a question as
to why a new vehicle ‘looses’ so much money as you drive it out of the dealership. The simple
reason is that, if the dealer were to take the vehicle back, he would have to recoup his costs
related to various overheads such as - floor plan costs, loss in value as a ‘used’ vehicle, sales
person’s commission, advertising costs, registration fees, etc. In practical terms the first year
of depreciation will always be the highest.
This is an example of the affect of model years on a vehicles cost of depreciation. Also, how
the timing of the purchase has a major impact on the costs of depreciation. The answers show
that depreciation will increase in the second scenario. The above annual depreciation
percentages are used when doing this calculation.
THE FIRST EXAMPLE –
THE MODEL YEAR EFFECT ON RESIDUAL VALUES
REPLACEMENT POLICY IS 3 YEARS/ 120 000
KILOMETERS.
THE PRICE OF THE VEHICLE IS R180 000.00
SCENARIO ONE:
The vehicle is purchased in January 2011 and sold in December 2013.
This vehicle would then be three model years old.
The depreciation will be 43%
43. 43
SCENARIO TWO:
The vehicle is purchased in August 2011 and sold in July 2014.
This vehicle would then be four model years old.
The depreciation will now be 51%
WHAT EFFECT WILL THIS HAVE ON THE VEHICLES OPERATING COST?
R14 400 extra depreciation costs.
Even if the vehicle has been ‘in service’ for three years, it has to be obvious that
buying later in a model year will generally increase the costs of depreciation.
Based on this example, it should be a normal rule in any company that “NO VEHICLES
WILL BE PURCHASED IN THE LAST THREE MONTHS OF THE MODEL YEAR.”
This second example uses different criteria and reinforces the problem of purchasing vehicles
at the ‘wrong’ time of the year. It is a little exercise for you to work out for yourself.
THE SECOND EXAMPLE OF THE MODEL YEAR PROBLEMS AND THE
EFFECT ON RESIDUAL VALUES.
Use the following information and work out the extra cost of depreciation.
REPLACEMENT POLCIY IS 4 YEARS/120 000
kilometers
THE PRICE OF THE VEHICLE IS R200 000.00
NOTE – USE THE DEPRECIATION PERCENTAGES FOR EACH YEAR THAT
WERE USED IN THE FIRST EXAMPLE. THE PERCENTAGE FOR THE FIFTH
YEAR WILL BE 5%.
44. 44
SCENARIO ONE:
The vehicle is purchased in January 2011 and sold in December 2014.
This vehicle would then be ……… model years old.
The depreciation will be ………………………%
SCENARIO TWO:
The vehicle is purchased in August 2011 and sold in July 2015
.
This vehicle would then be ………Model years old.
The depreciation will be ………………………%
WHAT EFFECT WILL THIS HAVE ON THE VEHICLES OPERATING COST?
R…………….. Extra depreciation costs.
YOUR ANSWER SHOULD BE R10 000.00.
This is a relatively simple calculation but it is not usually done properly from a comparative
point of view, by fleet owners.
Take your own fleet of vehicles and assume that only half of the vehicles you buy every year
are bought towards the end of the year. You will quickly see that the extra costs in
depreciation add up to a large amount of money. Although discounts are important, you save
much more money if you look after your depreciation costs, rather than chase that extra 1%
discount.
DISCOUNTS
All the motor manufacturers and their dealers offer varying levels of discounts and rebates to
fleet owners when they purchase vehicles. Each supplier has their own way of setting their
various levels of discounts. These can vary between 2% to 15%. They are usually based on the
size of the fleet and are published for dealers to use when they sell vehicles.
Sometimes the dealers themselves will add on an extra discount depending on how much they
want to do the sale. It is very important for fleet owners to ascertain exactly what discounts
they are due when purchasing their vehicles.
45. TIMING OF PURCHASES
It is a simple principle that the earlier in the model year you buy the vehicle, the more time you
have to recover the cost of depreciation. As explained above, a vehicle bought in January on a
three year replacement policy will still be three years old when sold. However, if bought later
in the year, it will become a four-year-old vehicle with the resulting increase in depreciation
costs.
The problem here is that the manufacturers close down over the year-end and even though
dealer stocks are built up, it is not always easy to get the vehicles needed in the early part of the
year. The answer is to project your purchasing at least a month in advance and place these
orders with the dealer. This will ensure you get the right vehicles at the right time and place.
Fleets tend to let new purchases roll along during the year with the odd variations forced on
them due to changing company policies. A more effective approach would be to move fleet
purchases to the earlier part of the year. This will have a positive impact on fleet operating
costs. It might take a year or two to make the shift, but it will be worth the effort. Remember
depreciation represents about 30% of total fleet costs and this type of decision will have a
positive effect on these costs.
The earlier you purchase new vehicles in the beginning of the year, the lower the final cost of
depreciation. The main objective is to not let your vehicle end up being an extra model year
older than it should be.
KNOW YOUR MANUFACTURERS
It is essential to make sure you know what is going on with the manufacturers. For example,
pricing increases, vehicle face lifts such as changes in specifications, new model launches, their
projected residual values for their different models, maintenance costs, fleet services,
discounts, special rebate programmes that are being offered, financing schemes. All these facts
add to the equation and will assist you in making proper purchasing decisions
CHOICE OF DEALER
Statistics have shown that 68% of companies select their supply dealer based on a “best price’
criteria. With the prices where they are this is not surprising. However, the various services
offered by a dealer are of equal importance and should be evaluated when making this type of
choice.
For example, matters such as financing schemes, maintenance plans, loan vehicles, buy back
values, fleet management advice, workshop quality, new vehicle deliveries, pre-delivery
standards, etc. Checking on these matters will ultimately assist in reducing fleet operating
costs.
The big thing to remember is that you are dealing with a changing market – nothing is
constant. It is a very competitive market. Manufacturers are constantly making changes as to
what they offer fleet owners. You need to be on your toes to optimize your purchasing
procedures and take advantage of the prevailing circumstances
46. 46
PURCHASING CHECK LISTS
An important part of your vehicle management process must be the development of various
check lists. Use them as standards on which to base your management decisions. Here is a
simple example of a purchasing check list to include in your policy.
Purchasing check list
1. Vehicle Prices
2. Discounts
3. Delivery costs
4. Financing options
5. Maintenance plans
6. Ordering in advance
7. Develop ‘spec’ sheets for vehicles
8. Special Vehicle Orders
Dealership selection
1. After sales service
2. Dealer network
3. Maintenance support
4. Parts and labour discounts
5. Dealer personnel
6. Delivery methods
7. Order timing
8. Fleet management support
9. BEE status
Please note – you will find an example of a vehicle specification sheet in the chapter on
Vehicle Asset management
As an exercise you should now make up a checklist of key criteria that you will use to set up
the purchasing policy for your fleet.
PLANNING IS ESSENTIAL
Purchasing is a complex process that involves vehicle selection for the company selector
lists, deciding which vehicles are to be replaced, contacting the appropriate drivers, getting
them to select their new vehicles, deciding on the financing methods and then finally
placing timeous orders. It all takes time and often, not the correct amount of planning is
done to ensure that new vehicles come into the fleet at the right time.
New vehicle prices will usually increase at 8% to 12% every year. Resale values will usually
keep in step with the general price increases but this does depend on current economic
factors.
Ordering early, e.g. at least two months in advance, can help you overcome other concerns,
including:
UNCERTAIN SUPPLY....
Manufacturers in smaller markets like South Africa are tied into fairly long pipelines from
their source plants and fixed production volumes can mean a shortage of certain models
and a disruption in the fleet’s replacement cycle. If you order early, you will get into the
queue for specific vehicles and reducing the likelihood of the specific vehicle not being
available when you need it in the fleet.
47. 47
LONGER LEAD TIMES....
In any growing economy the demand for vehicles is likely to increase and you often see lead
times extending as the manufacturers try to keep up with the demand for new vehicles.
Lead times for vehicles that require special equipment or are in the higher priced sector,
could increase even further in this type of situation. When demand is high, manufacturers
are not always able to add capacity to meet increased demand; they unfortunately have to
extend the waiting period for everyone.
Actively managing the replacement of vehicles by ordering at least two months before the
end of the model year will help you to manage depreciation more effectively. Each
ordering situation is unique, and there is no formula to determine the precise or the best
moment for you to place your orders. However, if you manage the replacement process
effectively, you will create considerable savings over the three or four year life cycle.
A simple financial example ------ If you have fifty vehicles in your fleet – the asset value
will be about R9m. If you can reduce your depreciation by just 5% a year, it works out to a
saving of R112 500. It means a total saving of operating costs of R450 000 over the four
years AND this goes straight to the ‘bottom line’. If you have 100 vehicles the saving will
be R900 000! If you have 400 vehicles, the saving will be R3.6m!!
Purchasing is definitely not just about ordering a vehicle at the best price or with
the best discount. It really is about managing your biggest cost in your fleet –
DEPRECIATION.
HAND OVER DOCUMENTATION
Part of your fleet policy has to set out how vehicles are handed over to drivers. Appropriate
extracts of the company’s policies together with a hand over form have to given to each
driver for their signature. Drivers should never be able to make the excuse that “I did not
know about that rule or regulation.” This is a very important aspect of driver management
and related HR matters within the company.
48.
49. 49
CHAPTER 5
VEHICLE FINANCING
Of all the methods used by companies to manage the operating costs of their fleets
financing techniques are probably the least understood and the most poorly used. The
main objective of this chapter is to help you obtain a basic understanding of the different
financing methods and how they can be best used when financing fleet vehicles.
Vehicle financing creates two types of vehicle costs – capital repayment and interest
payments. The ultimate objective of financing vehicles is to pay the minimum
amount for the usage of the best vehicles required by the company.
These costs cover two thirds of a vehicle’s total operating costs. They are not costs that
should be ignored, simply because you do not fully understand financing concepts for
vehicles.
The information covered in this chapter will help you to –
• Know why financial policies are so important to the running of a
fleet.
• Know the elementary definitions of each type of financing
method.
• Know the pros and cons of each type of financing.
• Understand the basics concepts of using Discounted Cash Flow
analysis.
• Be able to understand and do basic financial calculations.
• Be able to do a leasing calculation using your calculator.
• Understand the importance of using residual values to reduce the
monthly financing costs.
• Know the basic concepts about Full Maintenance Leasing (FML)
.
Although this chapter will deal with financing in a relatively simple way, it is quite a complex
subject that ranges from simply paying cash for a vehicle, right the way through to using
discounted cash flow analysis techniques (DCF), to decide on the best financing methods.
FINANCIAL POLICIES
Different methods can be used to finance vehicle purchases. Choices have to be made as to
what methods are the best to use that will suit a company’s overall financial situation.
Proper financial policies are essential because of four main factors:-
1. Rising vehicle prices. We live in times when these prices will continue to increase. It
will not always be possible to pay cash.
50. 50
2. Double-digit motor industry inflation. Vehicle operating cost inflation runs at +/-
12%. Costs continually escalate.
3. High interest rates. These rates have a material impact on financing methods.
4. The unit of currency’s reducing purchasing power. This relates to the rate of inflation
and the fact that a vehicle purchased today will probably cost a lot more in four years
time.
These economic factors will obviously vary from country to country, depending on local
economic influences. However, they will always have a direct influence on vehicle operating
costs.
THE MAIN FINANCING METHODS
These are:-
• Cash purchases
• Instalment Sales (corporate)
• Leasing
• Operating Leases
• A Full Maintenance lease – (Closed end lease or Contract Hire)
CASH PURCHASES
A cash purchase is where you use the company’s own funds to purchase the vehicle. No bank
is involved. The only interest cost relates to the interest you lose by withdrawing the money
from a bank account. The vehicle is capitalised as an asset and can be depreciated at a certain
percentage per year. These percentages are set by the Receiver of Revenue or some
international accounting practice criteria. More recently the international GAAP instructions
will be applied.
Proponents of buying outright say that it gives the company complete flexibility and control
over the vehicles. And that discounts on the retail price of new vehicles go directly to the
buyer. Discounts can be as high as 10% - but many smaller companies get much lower
discounts than these figures.
There usually is a clear relationship between the level of discount and the size of the company.
Bigger companies tend to pay cash because they usually have bigger “free” cash resources.
However, the smaller company tends to use financing for vehicle purchases, simply because
they do not have the spare financial resources.
CASH PURCHASING PROBLEMS:
Some companies use overdrafts or bank loans to finance vehicle purchases. This not a very
good practice in general terms because the loan can be called in at any time. A bank loan can
be matched to the life of the vehicle, but the repayment terms are unlikely to recognize the
significant residual value of the vehicle at the end of its corporate ownership.
