Increasing Fleet. Effective Strate. One facet of fleet management

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1 Effective Strate Increasing Fleet During the heady economic growth of the 1990s, many fleets increased in size. Many also experienced dramatic changes in fleet composition such as an increased number of SUVs. For many, it s now time to pay the piper. By Paul T. Lauria One facet of fleet management and operation that almost always receives scrutiny during tight budget times is fleet size and composition. In fact, two of the three most common directives to fleet managers in an economic downturn are 1. reduce fleet replacement spending; and 2. reduce fleet size (and the third being to explore outsourcing). Recent issues of newspapers and trade publications are replete with headlines about states and localities slashing replacement budgets and mandating reductions in fleet size. After the heady economic growth of the mid to late 1990s, it is hardly surprising that many fleets have increased in size in recent years. Many also experienced a pronounced change in the composition of their passenger vehicle ranks from sedans and vans to SUVs. For many such organizations, it s now time to pay the piper. Ideally, however, actively managing fleet size, composition, and utilization is not something that occurs only when money becomes tight. Rather, it is a continuing priority of fleet managers and their customers that recognizes that government has a fiduciary responsibility to use resources paid for with taxpayers money wisely. As many fleet managers also know from painful experience, the real or perceived misuse of government vehicles can create public relations nightmares. Therefore, proactive management of vehicle assignment and use is essential for managers who want to keep themselves and their bosses and customers out of hot water. Whose Responsibility is It? Who should be responsible for deciding how many and what types of vehicles and equipment fleet user agencies should have in their possession? Traditionally, fleet managers (rather than user agencies) were held to account for fleet size 14

2 gies for Utilization and composition, and many of them used to played the role of car czar with gusto despite the sometimes rocky relations this created with fleet users. In some jurisdictions, unfortunately, this is still the case. However, the increasing use of cost charge-back systems in the past 15 years or so has tempered fleet managers enthusiasm for acting as the final arbiter of vehicle purchase and assignment deci- sions. They have come to recognize that it is difficult to regulate your customers behavior and have them want to continue to do business with you. Charge-back systems have forced fleet managers to become much more customer service oriented for the simple reason that fleet users are more protective of their vehicle usage perogatives and their treatment by fleet management organizations when they are footing the bill for the vehicles they use and the services they consume. This does not mean that fleet management organizations should be relieved of any responsibility for managing fleet size, composition, and utilization. On the contrary, these organizations usually are the only central repositories of data on the jurisdiction-wide deployment and use of vehicles and equipment. As the buyers, maintainers, fuelers, and disposers of vehicles, moreover, they are uniquely positioned and qualified to observe and collect information on how (and how much) fleet assets are used and to determine the suitability of the size and composition of the fleet to such usage habits. It is safe to say, therefore, that managing fleet size, composition, and utilization is a shared responsibility between 1. fleet users; 2. budget analysts and decision makers from whom user agencies must secure the funds needed to acquire, operate, and replace vehicles (along with myriad other types of resources); and 3. fleet managers. The most appropriate role for fleet management organizations is to provide information and guidance to their customers and, when asked, to management decision-makers and elected officials aimed at helping fleet user organizations optimize their vehicle acquisition and assignment decisions and utilization practices. To the fullest extent possible, fleet managers should resist calls from management to decide whether specific assets should be retained or removed from the fleet. As convenient and tempting as it might be for management to be able to hold one individual or organization accountable for the size and composition of the fleet, such expectations are unfair to both fleet managers and their customers. Making the fleet manager responsible for controlling fleet size is like holding the personnel director accountable for the size of the government payroll. In keeping with the principle that fleet managers should be advisors rather than decision-makers in the management of fleet size and composition, there are a number of strategies for optimizing utilization with which all fleet managers should be familiar. Fleet Right-Sizing Studies These studies used to be called downsizing studies, but that is no longer the politically correct term for such investigations. Regardless, the main goal of this strategy is to reduce the size and cost of the fleet in the near term by identifying specific vehicles and pieces of equipment whose continued ownership is not warranted by their current level of usage and disposing of them. Even when an organization has welldesigned vehicle purchase justification and cost charge-back processes (discussed in more detail later), conducting a fleet right-sizing study every five to seven years can uncover assets that are no longer needed. Over time, fleet users inevitably acquire some vehicles whose utilization is not on par with the usage levels established by policies or guidelines aimed at cost justifying all vehicle acquisitions and assignments. This may be due to an agency securing one-time grant funds or appropriations to buy vehicles to support a new program or temporary initiative. It may result from agencies adding free federal surplus equipment to the fleet. In addition, agencies fleet needs change over time and a vehicle that was heavily used at one time may no longer be needed due to a change in agency mission or work methods (say, as a result of outsourcing an activity). July / August 2003 Government Fleet 15

3 An effective fleet rightsizing study has three main components: Developing a fleet inventory and vehicle usage data. Identifying candidates for reassignment or disposal. Negotiating the disposition (retention or removal) of candidate vehicles. The process begins with deciding which vehicles in the fleet, if any, should be excluded from the study. In almost every government jurisdiction, there are certain officials who receive an assigned vehicle as a perquisite of their position. In essence, this means that they are not expected to demonstrate their need for the vehicle to perform their job duties by, for example, driving a minimum number of miles per month. Since the fundamental goal of a right-sizing study is to identify vehicles for which there is not a demonstrated business need, vehicles provided as perks obviously should Fleet managers should resist calls from management to decide whether specific assets should be retained or removed from the fleet. not be included in such an analysis. Due to the highly specialized nature of their use and of the activities they support, marked law enforcement and emergency medical service vehicles and fire apparatus also typically are excluded from fleet right-sizing studies. Once these vehicles have been removed from consideration, a fleet inventory database containing information on the remainder of the fleet should be created. In addition to obvious pieces of information like vehicle identification numbers and user agency names, the database should include recent meter readings and dates and, if possible, total miles or hours of usage in a recent 12- month period, for each asset. While annualized rates of use can be estimated from meter readings and in-service dates or model years, such estimates can be wildly misleading in the case of older vehicles that are little used at present. The next step in the study is to use the inventory data to identify candidates for reassignment or disposal; basically, assets whose retention in the fleet does not appear to be justified. To the extent that meter readings are available and believed to be accurate, these data should be used to screen vehicles for in-depth analysis. Otherwise, vehicle usage data will need to be collected through the much more laborious process of surveying vehicle operators. The purpose of the screening process is to segregate the fleet into two categories: those assets whose use is obviously high or probably acceptable, and those whose use is questionable or obviously quite low. Screening criteria should be chosen with an eye to keeping the number of vehicles to be scrutinized in detail to a manageable level. Commonly used thresholds for assigning each vehicle to either the acceptable use or questionable need category include 80 percent of formally established minimum monthly (or annual) usage levels, and 50 percent of the mean annual utilization level by type of asset. That is, a vehicle whose utilization averages less than 80 percent of the minimum use requirement (if such policies are used in the organization) or 50 percent of the average usage for all vehicles in the fleet of that type would be earmarked for further investigation as a candidate for disposal. Except in the case of very small fleets, the next step in the right-sizing study process is to develop and administer a questionnaire to the operators of each and every vehicle that falls into the suspect i.e., candidate for elimination category to find out more about how they use these vehicles. Due to the fact that meter readings are not always a good indicator of either the use of, or need for a vehicle, the questionnaire should be designed to elicit additional information about how and when the vehicle is used, such as where it is domiciled and driven; whether or not it is shared by multiple employees; whether an employee takes it home at night; and how the employee gets around when the vehicle is in the shop for servicing or otherwise is unavailable. Once the vehicle utilization survey has been administered, response data can be tabulated and analyzed to further refine the list of candidates for reassignment or disposal. In doing this, particular attention should be paid to determining when and for how long during a typical work week each candidate vehicle is away from its primary domicile, since the utilization of a vehicle cannot be improved if that vehicle is not accessible to other potential users. The availability, accessibility, and cost of a suitable alternative to continued ownership and assignment of an under-utilized vehicle also needs to be explored through the survey process, the end result of which should be a final, scrubbed list of vehicles targeted for elimination from the fleet. The final step in the study process is to meet with representatives of the agencies that own these candidate vehicles and obtain their consent to eliminating them from the fleet. If the study team has done its work properly, the benefits of doing this should be self-evident to the user agency. Nonetheless, a certain amount of give-and-take should be expected during this negotiation process, and the user should be permitted to make the final decision as to whether to keep or give up the vehicle. It often is helpful during these discussions to remind users of the political benefits of playing ball and agreeing to give up some vehicles. A steadfast refusal to relinquish any vehicles usually reflects poorly on an agency when management asks for a final scorecard on the results of the rightsizing study. But Will It Save Money? Fleet right-sizing studies unquestionably save money over the long-term, but don t necessarily produce big budget savings in the short-term. A good rightsizing study can result in a reduction of as much as 20 percent in fleet size. Politi- 16

4 cally, that alone is worth a lot to most management and elected officials. Invariably, however, many of the underutilized vehicles that agencies relinquish as a result of such studies are older assets that have been kept in the fleet as backups or spares. They often are fully depreciated, have little residual value, and, because they are not driven much, do not consume a lot of fuel or maintenance and repair services. It also should be remembered that getting fleet users to increase their shared use of a smaller number of fleet vehicles (new or old) generally does not reduce fleet operating costs, only capital costs. On the other hand, eliminating unneeded vehicles always generates some immediate salvage proceeds, and ensures that future fleet replacement costs will be lower as long as the vehicles eliminated would eventually have been replaced whether with another used vehicle or with a new vehicle. If an organization finances its fleet replacement costs with cash from ad hoc appropriations, such eliminations might reduce funding requirements by a significant amount in the next few years. If it uses either a reserve fund and charge-back system or lease purchasing, a reduction in fleet size might allow it to reduce both lease/user charges and its fund balance immediately. Finally, eliminating vehicles from the fleet may reduce discretionary trip making somewhat, and can also save money by avoiding major repair bills on (not to mention accidents involving) older vehicles and equipment. These savings alone might pay for the cost of conducting a right-sizing study many times over. Vehicle Assignment Justification Procedures and Utilization Guidelines Whereas a fleet right-sizing study involves taking a snapshot of, and making one-time adjustments to, fleet size and composition, it does little to promote efficient utilization of vehicles on an ongoing basis. For this, fleet managers need to employ other strategies, starting with an assignment justification process and vehicle utilization guidelines. The objective of these two strategies is to ensure that the acquisition of a vehicle or piece of equipment constitutes the most effective means of meeting a particular fleet user s need before such an acquisition occurs. The objective of an assignment justification procedure is to get fleet users to define their vehicle needs precisely and to consider alternative ways of meeting them, of which the permanent addition of an asset to the fleet is but one option. If such a procedure is designed properly and used consistently, it will help fleet users avoid acquiring vehicles needlessly, thereby promoting higher vehicle utilization levels and saving money. The justification process should be designed so as to require fleet users to define their need for a One of the most effective strategies for getting fleet users to pay attention to fleet utilization is to quantify and publicize how much they use their vehicles and equipment. vehicle precisely, with particular emphasis being placed on the timing, frequency, and duration, and the predictability and user s flexibility with respect thereto, of the vehicle s use. The process should be structured to then explore the availability and comparative costs of alternative methods of meeting this need. If an organization has to have a vehicle at certain times and there simply are no viable alternatives to owning it (such as borrowing it from another agency or jurisdiction or renting it commercially), consideration of the expected level of use of the vehicle basically becomes mute. Part and parcel of the acquisition justification process is the establishment of utilization guidelines for the different types of assets in a fleet. The purpose of such guidelines is to help fleet users determine when it is appropriate to own a vehicle, when it is more cost-effective to rent the vehicle as needed either commercially or from an in-house pool, and (in the case of passenger vehicles) when it makes sense to reimburse an employee to use a personally-owned vehicle on government business. Many fleet management organizations establish minimum usage requirements aimed at ensuring that assigned vehicles generate sufficient charge-back revenue to cover their fixed costs; this is unrelated to the use of utilization guidelines for evaluating alternative vehicle acquisition methods. Utilization guidelines should be designed so as to facilitate break-even analyses between ownership and other options for meeting a user agency s need for a vehicle. For example, the equation in Chart 1 illustrates the nominal breakeven point in annual miles between providing an employee with a vehicle and reimbursing the employee to use a personal vehicle on employer business. Of course, the simple formula shown here does not take into account any of the indirect or hidden costs associated with allowing an employee to claim $4,500 per year in mileage reimbursement. Nonetheless, it shows how vehicle utilization guidelines can be employed to evaluate alternative approaches to meeting an employee s need for transportation. (Substituting a cost per rental transaction for the reimbursement rate, and an annual number of rental transactions for the breakeven mileage amount, would allow us to assess the comparative costs of owning versus renting a vehicle or piece of equipment.) Measuring and Reporting Vehicle Utilization Levels One of the most effective strategies for getting fleet users to pay attention to fleet utilization is to quantify and publicize how much they use their vehicles and equipment. Producing a monthly exception report for each user agency that identifies those vehicles that fall short of either established utilization guidelines or average utilization levels by class of ve- July / August 2003 Government Fleet 17

5 hicle is a good place to start. Even more effective in promoting efficient fleet utilization is publishing a report that summarizes such statistics by user agency and for the fleet as a whole. Peer pressure, insights gained from seeing how much other agencies utilize their vehicles, and the knowledge that upper management and internal auditors may be scrutinizing such reports, all tend to have a salutary effect on agencies attentiveness to this aspect of their performance. Charging Users for Vehicle Availability (Not Usage) As alluded to earlier, there has been a significant increase in the past 15 years or so in the use of internal service funds and charge-back systems to finance fleet capital and operating costs. This trend has opened many fleet managers eyes to the potential impact of user charges on fleet utilization levels. In fact, some organizations have experienced voluntary reductions in fleet size of close to 20 percent as a result of switching from cash financing of vehicle purchases to a reserve fund or lease purchasing and monthly user charges for vehicle replacement. How does this happen? When fleet assets are paid for with cash from direct, lump-sum appropriations, fleet users have little economic incentive to pay attention to, let alone turn in for disposal, under-utilized vehicles and equipment. This is because the acquisition cost of a vehicle appears to the agency that uses it to be a sunk cost, meaning that they cannot reduce this cost by increasing their use of the vehicle, or eliminate it by removing the vehicle from the fleet. The reality, however, is that it is not a sunk cost because vehicles depreciate over time, not all at once when they are first put into service, and this depreciation cost can be stopped at any time by selling a vehicle and recouping a portion of its original purchase price. The problem here is that cash financing of vehicle purchases does a poor job of illustrating this relationship between a vehicle s capital cost and its usage. Certain types of charge-back rate structures do a good job of illustrating this relationship to fleet users and thus create economic incentives for them to get rid of or not replace vehicles that they don t really need. A chargeback process that distributes the full purchase price of a new vehicle to the agency to which it is assigned obviously does not do this; nor does a rate structure that distributes vehicle capital costs based on the number of miles or hours that a vehicle is used each month. Neither of these charge-back approaches illustrates the linkage between a vehicle s capital Using utilization guidelines to evaluate own vs. reimburse Annual Cost of Employer Vehicle: $4,500. Reimbursement Rate (per mile): $0.36 Annual Break-even Mileage ($4,500 / $.36): 12,500 Break-Even Cost (12,500 x $0.36): $4,500 costs and its day-to-day and month-tomonth availability to a user agency. Fixed monthly replacement charges, on the other hand, continually confront fleet users with the fixed costs of having vehicles at their disposal. No matter how much or how little they use an asset in a particular month, these charges don t change just as the actual depreciation of the asset doesn t change (at least in the short-term). Consequently, there is a clear fiscal (budgetary) benefit to maximizing fleet utilization under this type of rate structure: getting rid of underutilized vehicles lower an agency s monthly fleet replacement charges. With usage-based charge-back rates, on the other hand, there often is a powerful economic incentive to hang on to underutilized vehicles because users are only charged for the amount of time or number of miles they actually use a vehicle. There is no financial penalty, in other words, for not driving a vehicle very much. In the absence of minimum monthly usage requirements, this type of rate structure can seriously understate (and under recover) the capital costs of owning and utilizing vehicles. It is a well-known fact that vehicle depreciation is one of, and in many fleets, the largest costs of a fleet operation. Controlling this cost requires proactively managing the number, types, and utilization of vehicles and equipment, a process which itself begins with justifying the acquisition of assets whether as additions to the fleet or as replacements for units already in it. At one time, this was largely a matter of the fleet manager regulating fleet user behavior by approving or denying requests to buy vehicles and conducting periodic recall campaigns (acrossthe-board reductions in fleet size) mandated by upper management. Happily, those days are long gone in most public-sector settings at any rate. There were two basic limitations of this old-fashioned approach to managing fleet utilization. One was that it inappropriately vested decision-making authority in fleet managers who usually lacked (and still do today) the intimate knowledge of user agencies operations and work methods needed to make sound vehicle acquisition and usage decisions. The other is that it created, due to this lack of operational knowledge, adversarial relationships between fleet managers and fleet users. Fortunately, there are still many strategies that fleet managers can employ to improve fleet utilization. One of the keys to their success, however, is close collaboration between fleet users who are best equipped to define how vehicles and equipment enable them to fulfill their missions and fleet managers who have technical expertise and access to jurisdiction-wide fleet data that individual user agencies lack. The other is using economic incentives Adam Smith s hidden hand to motivate fleet users to make sound vehicle acquisition and utilization decisions out of enlightened selfinterest. Both short-term-oriented rightsizing studies and ongoing utilization management processes will go a long way toward optimizing the size and composition of any fleet as long as they are founded on these two principles. GF FOR MORE INFORMATION: Paul Lauria is the president of Mercury Associates, Inc., a fleet management consulting firm headquartered in Gaithersburg, MD. He can be reached at plauria@mercuryassoc.com. 18