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VEHICLE MANAGMENT

A MODERN APPROACH

BY MICHAEL CRANKSHAW

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FLEETCUBE PUBLISHERS67 7TH Street, Linden

JohannesburgSouth Africa

First published in 2004Second 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.

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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!”

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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 CrankshawCEOFleetCUBE January 2012

Index

CHAPTER 1 – THE GENERAL VEHICLE MARKET Page 5CHAPTER 2 – FLEET AUDITS Page 17CHAPTER 3 – VEHICLE SELECTION PRINCIPLES Page 31CHAPTER 4 – PURCHASING VEHICLES Page 41CHAPTER 5 – FINANCING TECHNIQUES Page 49CHAPTER 6 - ACCIDENT MANAGEMENT Page 67CHAPTER 7 – MANAGING MAINTENANCE Page 75CHAPTER 8 – REPLACEMENT POLICIES Page 85CHAPTER 9 – USED VEHICLE MARKETING Page 95CHAPTER 10 – VEHICLE ALLOWANCE SCHEMES Page 103CHAPTER 11 – CONTROLLING EXPENSES Page 113CHAPTER 12 – FLEET MANAGEMENT PRINCIPLES Page 121CHAPTER 13 – OUTSOURCING CONCEPTS Page 139CHAPTER 14 – FULL MAINTENANCE LEASING Page 153CHAPTER 15 – VEHICLE ASSET MANAGEMENT Page 164CHAPTER 16 – SUPPORT MATERIAL Page 180

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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 manufacturersThe National Association of Automotive ManufacturersVehicle Rental and Leasing Associations The Government Department of StatisticsIndustry SurveysThe Internet from websites such as www.fleetecube.com

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 countryTotal 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 IndividualsVehicle 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.

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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.

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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.

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

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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 DEVELOPMENTThese are the rules and regulation that set out the policies related to the daily operations, for both the vehicles and the drivers.

ADMINISTRATIONThis 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 MANAGEMENTThis 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: -

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.

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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.

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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.

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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.

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 management20% - administrative staff and middle managers70% - 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

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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 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:

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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

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 properlyIn 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.

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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

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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.

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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?

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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 priceDepreciationProjected resale valueMaintenance costFuel consumptionOverall 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 saleo Leasingo Operating rentalso Full maintenance lease

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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 rates10. 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.

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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 QUESTIONNAIREFLEET 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

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2. SELECTION:Do you allow employees a choice of vehicles?Yes No Are they restricted by:Models on the sector list?Yes No 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 CYCLEWhen do you normally replace vehicles?..................................……..................................................................................................

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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?....................................................................................................................................................................................................................................…………...................................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?................................................................................................................................................................................................................................................................………….......

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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. INSURANCEWhich insurance brokers do you make use of?...........................................................................................................................................What type of insurance cover do you have? Describe in detail..............................................................................................................................................................................................................................................................................................................................................

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....................................................................................................…………….………………………………………………………………………..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?..................................................................................................................................................................................................................................................................................................................................................................................................

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7. MAINTENANCEDo 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 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?

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8. DISPOSAL OF USED VEHICLESWho 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?

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9. FINANCEHow 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?...........................................................................................................................................What is the monthly depreciation?...........................................................................................................................................What is the monthly interest charge?...........................................................................................................................................

10. ADMINISTRATIONWho manages the fleet operation?...........................................................................................................................................How many people are directly involved in fleet management?...........................................................................................................................................Annual salary bill for these employees?...........................................................................................................................................

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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?...........................................................................................................................................

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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 specialistContacts to purchase vehicles country-wideTop discounts available from all dealersKnowledge of pending price increasesVehicles always delivered when orderedDealers deliver to your company nation-wideAdvance knowledge of changed vehicle specificationsEasy, simple administration and ordering systemEfficient, controlled hand-over to drivers

MAINTENANCE MANAGEMENTMaintenance payments are validated through a fleet cardAll repairs and services are pre-authorisedVehicles are properly managed on a national levelSpecial rental company rates are available when vehicles break downA driver’s maintenance instruction manual is availableServicing frequencies correctly controlledA simple system to claim VAT inputs is available

END OF VEHICLE LIFE PROCEDURES:Driver option to purchase the vehiclePrices are predeterminedThe vehicle condition is properly assessedThe condition report is signed by the driverUsed vehicle market prices are constantly evaluatedNo resale risk exists

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No opportunity for fraud existsNo risk of non-payment exists

FLEET MANAGEMENT PROCEDURES:Costs are controlled with accurately projected residualsBudgeting costs are fixed for vehicle’s lifeVehicle kilometres are constantly monitoredExpert advice is available on internal fleet management controlsenior fleet management control on all fleet operationsVehicle selection advice from the expertsarious programmes available for different operationsExcellent fleet management and financial reportsProper replacement timing ensures optimum operating costsProper accident reporting proceduresProperly controlled licensing and registrationProperly managed utilisation and availability

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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 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.

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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.

It makes good sense to apply different selection criteria for each personnel level in the fleet. The

10% Senior Managers20% Middle Managers65% Essential Users5% Entry level vehicles

Light commercial vehicles percentage can be split at various levels, but on average fleets they represent about 28% of the fleet.

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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.

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

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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

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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

Selection Criteria

1. Initial cost2. Repair record3. Depreciation/resale value4. Job suitability5. Fuel economy6. Safety record and serviceability7. Warranty programme8. Insurance costs9. Drivers preference10. Company image11. Order/delivery12. Administrative ease13. Fringe benefit value14. Country where

manufactured

Rating

8.27.427.427.367.187.096.155.245.155.124.74.33.613.3

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%.

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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.

1. ECONOMYCapital Cost

Residual Value

Service AvailabilityTyre costsFuel costsInsuranceMaintenance 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 important4. REWARDS &

MOTIVATION-image for the user. A higher level vehicle for the top performer

5. UTILITY -size related to usage6. BODY TYPE -resale value and usage are offered7. 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

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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.

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.

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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 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

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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.

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(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 kmsFuel : 10l / 100 kmsFuel Price : R10R+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 RVA net purchase priceThe fuel cost in rands

To do this example now, please follow each step:Net Price : R192 0.00Resale Value : Over 4 years will be 45% of the RETAIL PRICE – R90 00.00Fuel 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 : = 48I : = 11PV : = -R192 000.00 .ENTER THE AMOUNT THEN PRESS THE+/- KEYFV : = R 90 000.00PMT : = R 3 461.24Add Fuel : = R 2 500.00Add R+M : = R 900.00TOTAL COST := R6 861.24 per month

1. To work out the costs/ kilometre:

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 vehicleDiscount – this is the current vehicle discount you would be able to obtain from the manufacturer

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Usage – this will be based on how long the vehicle will be used before it is sold. It relates to the replacement policy.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.

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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 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 of3rd year 8% } 4 years and 120 000 kms4th 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

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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%

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

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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%.

SCENARIO ONE:

The vehicle is purchased in January 2011 and sold in December 2014.

This vehicle would then be ……… model years old.

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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.

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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

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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

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 Prices2. Discounts3. Delivery costs4. Financing options5. Maintenance plans6. Ordering in advance7. Develop ‘spec’ sheets for

vehicles8. Special Vehicle Orders

Dealership selection1. After sales service2. Dealer network3. Maintenance support4. Parts and labour discounts5. Dealer personnel6. Delivery methods7. Order timing8. Fleet management support9. 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.

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.

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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.

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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.

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.

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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.

Vehicles bought for cash can also represent an administrative burden. Staff must devote considerable time to locating, buying and selling vehicles, to annual licensing and insurance, to the provision of temporary replacement vehicles, possibly requiring expensive pool vehicles, to arrangements for maintenance and repairs, and to the payment recording and control of all the relevant cost. Many of these functions or internal company operations could be outsourced if the vehicles were not bought for cash.

A point against paying cash is that this money is obviously tied up in what really is a depreciating asset. If the vehicles are financed, this money can be used for other needs within the company that will help the company improve its profitability.

THE FINANCE LEASE:

The straight forward finance lease (open ended lease) is generally the most popular finance technique used by corporate vehicle owners. The money supplier e.g. the Bank, retains ownership and the user pays monthly charges, which include capital and interest payments. Liability in the lease must be noted on the lessee’s balance sheet and the appropriate depreciation allowance can be applied. The user is responsible for all expenses and management of the vehicle. Final residual values (balloon payments) are often built into financial agreements as a final payment.

The basic effect of using residual values is to reduce the monthly payments. These residual values should always be market related, for

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example, at least +/-5% less than the projected resale value or trade in value the monthly payment. This aspect of structuring leases can have a big impact on reducing depreciation and operating costs.

INSTALMENT SALE:

Statistics show that this type of financing is not used a lot by companies. The main reason for using this method is because the company intends to take ownership of the vehicle when the last monthly instalment has been paid. To all intents and purposes, it is similar to the finance lease. As its name suggests, the user pays the supplier a fixed monthly instalment for an agreed time.

Unlike the finance lease, this method enables the user to take legal ownership of the vehicle on the payment of the final instalment. The user pays all the running costs and the vehicle must be included on his balance sheet. The normal depreciation allowances are claimed by the company including the interest costs.

THE FULL MAINTENANCE LEASE:

Residual values of vehicles will represent some form of risk to the vehicle owner. The used vehicle market is affected by many economic variables. This means that without professional help the vehicle owner is always exposed to significant depreciation risks. It is essential that companies and anyone involved in vehicle depreciation should appreciate what is happening with residual values and be guided by market trends. Selection decisions should not be based on initial purchase price alone no matter what the discounts might be.

Where companies are concerned about managing the vehicle and residual value risk, they often switch to full maintenance leasing (FML). Often the main objective is to get the vehicles off balance sheet. The full maintenance leasing system involves the company paying a FML company a fixed month rental for the use of particular vehicle for a pre-agreed period and kilometres.

Monthly payments usually cover all servicing and maintenance costs. The company never owns the vehicle, cannot claim depreciation for it and takes no risks in its residual value. Moreover, the vehicle never appears on the company’s balance sheets. The company can however, charge the rental payments directly against profits as a deduction for tax purposes. VAT tax inputs can also be claimed on the deemed operating costs portion of the monthly payments.

THE BASIC PROS AND CONS

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Many people, even accountants have different opinions and attitudes about the four types of financing. It is a subject that requires quite a lot of knowledge in terms of financing movable assets. Making fleet financing decisions is not an easy task. It needs constant review within a company’s internal financial policies. To help you understand these methods, you need to know the basic pros and cons of each type of financing.

The following comparisons will give you a simple overview of the pros and cons of the different financing methods.

1. CASH PURCHASES

PROS CONSOWNERSHIP LOSE USE OF WORKING CAPITALNO BANK INVOLVED LOSE INTERESTNO BANK INTEREST ONLY 20% DEPRECIATION PER YEARNO REALE RESTRICTIONS

ON BALANCE SHEET

2. LEASING

PROS CONSPAY FOR USAGE PAY BANK INTERESTRETAIN WORKING CAPITAL BANK OWNS VEHICLEEARN INTEREST COSTS OF EARLY TERMINATIONINVESTMENT OPPORTUNITIESPAYMENTS ARE TAX DEDUCTIBLELINK/ FIX RATESFLEXIBLE PERIODSFLEXIBLE STRUCTURES

ON BALANCE SHEET – INTERNATIONAL ACCOUNTING RULES

FLEXIBLE TERMINATIONEXTEND LEASE BUT MUST HAVE MINIMUM 10% RVSELL – RECOUP OR LOSSBUY – AT RV PLUS VAT

SOME IMPORTANT GENERAL POINTS ON LEASING

CREDIT LINES ARE RETAINEDMAKES FOR EASIER BUDGETINGEASES BUDGET RESTRICTIONS

3. INSTALMENT SALE

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THE OBJECTIVE HERE IS TO OWN THE VEHICLEIT IS EXACTLY THE SAME AS A LEASECAN CLAIM 20% ANNUAL DERPRECIATION PLUS INTERESTON BALANCE SHEET

4. OPERATING LEASE - FML

EXACTLY THE SAME AS A LEASE – BUTVAT IS PAID MONTHLYIT IS ‘OFF’ THE BALANCE SHEET

BUT THERE ARE THREE IMPORTANT RULES THAT ARE NORMALLY APPLIED

1. MUST BE A CORPORATE DEAL2. NO PURCHASE OPTION TO THE LESSEE3. NO REWARD OR RISK – A REPURCHASE AGREEMENT IS NEEDED

FINACIAL CALCULATIONS

In this introduction to finance calculations, we will be covering:-

Simple Interest Compound Interest Future Value Present Value Discounted Cash Flow Lease Calculations

INTEREST

What do we mean by interest? Interest is a charge for the use of money. In a sense you “rent” the money, or someone rents it from you. The interest amount is based on three things:-

The amount of money borrowed or saved The length of time The interest rate (a percentage)

EXAMPLEThe longer you borrow money, the more it will cost you, likewise, the higher the rate, and the more it will cost you. Use your financial calculator to do and check these examples:-

SIMPLE INTEREST

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What do we mean by Simple Interest?

Here, only the principal, i.e. the original amount of money earns the interest, for the entire life of the transaction.

EXERCISE

Borrow R1000.00Interest 8% p.a.

Therefore on month costs: R1000.00 x R0.67/100 = R6.67

Over three months = R20.01 and so on…

FUTURE VALUE

What does this mean?

This is the worth or value of your investment at the end of any given period.

EXERCISE (Use the PV and FV keys on your calculator)

You have R1000.00 now

How much would this be worth to you with 15% inflation p.a. after 2 years?

The answer is R1 347.35

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PRESENT VALUE

What does this mean?

Given the value of something in the future, you can calculate how much this would mean to you now.

EXERCISE (Use the PV and FV keys)

You are told you will be receiving R10 000.00 in 2 years time. How much is this money worth in present terms @ 12% inflation p.a.?

= R7 875.66

Would you rather receive your money now or in 2 years time? Or now?

COMPOUND INTEREST

Compound interest is the method of re-investing earned interest, and is much more common in business transactions than simple interest. Compound interest is usually stated as an annual rate.

EXERCISE

Compare interest earned on compound and simple interest

Invest R1 000.00 for 2 years @ 8% p.a.Simple interest = R160.00 interest earned on money

Compound interest = 1st year R80.00 on R1 000.00 2nd year R86.40 on R1 080.00 = R166.40

Compound interest is the more commonly used in business and is stated as an annual rate. FV is the value of money at the end of a given period and PV is the value of something now.

RESIDUAL VALUES

If we use the concept of building in a residual value or balloon payment at the end of the financing period, it is possible to reduce the monthly payment of a financed vehicle.

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A SIMPLE CALCULATIONThe facts are as follows:

Vehicle purchase price R200 000.0 (incl. VAT)Finance period 48 monthsInterest rate 11%What is the monthly instalment – in advance? It is R5 169.10

Now you can also add in a final balloon payment or residual value (RV) based on paying 48 instalments plus the RV. Use R80 000.00 as the RV and the payment will be R3 834.80

You can see that by including a RV you can actually REDUCE the monthly payments.

The difference in monthly payments is R1 334.30. Over 48 months this adds up to R64 046.59 less in cash flow to drive the SAME vehicle. Just imagine if you had 50 vehicles like this in the fleet! The total cost savings be – R3 202 329.49. As you can see it is just over R3 million which is a considerable saving in operating costs.

Residual value leasing or financing is an extremely important financial technique. A key issue in fleet management is to pay the optimum monthly amount for the ‘use’ of a vehicle. The proper method is to –

1. Fit the lease period to the replacement period2. Estimate the resale value3. Select a RV a little below the market value4. The resale amount is used to pay the final RV payment

Let’s do another simple calculation on a ‘full pay out’ lease compared to a lease with a residual value.

Work through the following example:-

Vehicle Price R180 000.00Usage is 3 ½ yearsInterest Rate is 11%Monthly payment R5 395.67

Build in a RV of R45 000.00Monthly payment = R4 459.25

What is the monthly saving? R936.42

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Over 3 ½ years? R37 456.71

With a fleet of 20 vehicles? R749 134.27

COMPARING THE FINANCIAL OPTIONS The main advantage of leasing is that your initial outlay of cash to gain the use of an asset is less for leasing than it is for purchasing on a cash basis. However, one of the disadvantages of leasing is that you usually end up paying out more over the asset's life than you would have paid if you purchased the asset.

Discounted cash flow analysis has been largely ignored by financial executives when decisions have to be made in respect of financing movable assets, vehicles in particular. These decisions are often made on the prognosis that – the money in the bank will only cost us the call interest rate and this is lower than the financing rate! This is not a very sound thought process.

How do you reconcile these two factors or what really is an investment in an asset? The one way is to do a mathematical analysis of your net cash flows that would result from leasing and from purchasing. This method is called a ‘discounted cash flow’ analysis.

A discounted cash flow analysis (DCF) provides an estimate of how much cash you would need to set aside today to cover the after-tax costs of each acquisition alternative. The analysis takes into account the "time value of money," which is basically the concept that you don't need to have R5 000 today to pay a R5 000 expense in one year. This is due to the fact that you can earn interest on your money.

To perform the analysis, you need to know or assume certain facts, including:

purchase and financing terms lease terms your income tax rate the asset's expected useful life to your business (for depreciation

purposes) the asset's estimated value, if any, at the end of its useful life to

your business Your ‘cost of capital’. Any other costs that you would incur if you leased the asset but

not if you purchased it, or vice versa (for example, you'd need to account for expected maintenance costs if the lessor was not assuming responsibility for those costs).

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This is an example of the cash flow analysis. The comparison is based on purchasing a vehicle for CASH compared to a FML contract (closed end lease).

1. The price of the vehicle is R135 000

2. The FML contract period is four years

3. The FML monthly payment is R3 700 a month

4. Various discount rates have been used

5. An income tax rate of 40% has been applied

6. The cash purchase ‘cash flow’ is as followsR135 000 cash payment20% depreciation each year of R27 000But the tax effect is R10 800 a year as incomeResale value at end of fourth year R27 000

7. The financing ‘cash flow’ is as followsMonthly payments of R3 700Monthly payments are tax deductible – the tax effect is R17 760 a year as incomeNo resale income

8. The NPV calculations are shown below using different ‘discount rates’Cash purchase Rate FML-R80 175 9% -R86 306-R84 402 12% -R80 914-R88 157 15% -R76 056-R90 430 17% -R73 079

9. The above NPV results indicate that the FML option is the best at discount rates that are above 9%.

10. A very important financial benefit of financing the acquisition of vehicles is that the capex allocation can be applied to core business requirements.

As a fleet manager you need to think about this key concept –‘Pay the minimum amount per month for the use of a vehicle. It is not necessary to own the vehicle to use it.’

It is has been mentioned more than once that effective financing is a key element in vehicle management. It should be of prime concern to the corporate executive. The following ‘Executive’s Guide to Vehicle

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Finance’ should assist any executive involved in vehicle management to gain a better understanding of the core issues related to this subject.

THE EXECUTIVE’S GUIDE TO FINANCE VEHICLES

FINANCING CONCEPTS

As you read this executives guide keep referring to this diagram. It sets out in relatively simple terms, the major financial areas of a company that benefit from using a financing method to acquire vehicles.

Flexibility

Intermediate To Long TermFinancing

VariedPaymentStructure

Capital Conservation

IncreasedROI

IncreasedBorrowingCapacity

Off BalanceSheetFinancing

Improved Cash Flow

Uses Inflation principle

100%Financing

TaxTiming

FinancingLines of Credit

SystemFlexibility

Credit Preservation

Acts to Increase Earnings

Profit Generation

BudgetExpansio

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THE EIGHT DIMENSIONS

Vehicle financing has been one of those aspects of Fleet Management that has not always received the attention that it deserves. In many ways “financing” has been maligned because talk has always been:”I need to own my vehicles” and usually:”Leasing is too EXPENSIVE”. Like all situations in life, there are at least two sides to any story, especially today with prices constantly increasing; it is becoming more difficult to purchase vehicles for cash.

FIRST DIMENSION - AN INTRODUCTION

Financing the acquisition of a vehicle is essentially a matter of timing. It effectively defers the expenditure of capital and leaves capital available for its most productive use.

By substituting the concept “to use” for the more passive “to own”, finance makes it possible to obtain vehicles without having to draw upon existing capital or having to raise new capital through loans or overdrafts.

A financing method that conserves an appreciable amount of capital can be a valuable management tool. It allows a more effective timing of capital expenditure and a greater potential return on the rand itself.

Financing will cost more than outright purchase in terms of total outlay, but its timing function will permit a greater retention of current capital. The essence of the matter is time, the discounted value of monies and the opportunity to invest the retained capital.

SECOND DIMENSION - CAPITAL CONSERVATION

Capital Conservation is the principle function of financing the acquisition of a vehicle.

But there is the case of the OPTICAL ILLUSION. The sum total of the individual payments will always exceed the vehicle’s total cost. Taking no other factors into consideration, you will conclude that financing is far more expensive than purchase. However, analysed correctly, the sum of the parts will prove less than the whole.

In terms of capital outlay, financing and purchase are poles apart.

Financing involves a stream of payments whose effective net cost is reduced by the tax saving that accrue when these are treated as a tax deductible expense. For every payment rand, the face value is R1, but if we assume you are paying taxes at the rate of 42% and you expense the payment, the actual net cost of each rand will be 58 cents.

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With purchasing, however, your capital investment is reduced over a period of years by your deprecations allowance. The cash flow comparisons will normally favour the financing method.

Cash flow comparisons are not the only factor to take into account. Discounted cash flow analysis is also an important technique used to assist you in selecting the most appropriate financing method for your particular circumstances. FleetCUBE offers this service to do discounted cash flow and will help to analyse the results of the various finance options being considered.

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THIRD DIMENSION - CHARACTERISTICS

In deciding on the financing option, some unique characteristics of these methods should also be considered.

100% Finance

Normally no deposits or down payments are required. There are no initial administrative or hidden costs.

Tax Timing

If payments are treated as fully tax deductible expenses, a tax timing advantage will result. The financing methods enable you to pay for the vehicle’s use out of the pre-tax income, instead of drawing on past profits.

Structured Payments

The period of the agreement is usually structured in direct relation to the assets useful life. Actual payments can therefore be structured to suit your own circumstances.

Other Costs

Costs relating to equipment, installation, maintenance and insurance can also be included and amortised over the period of the agreement. This further reduces the capital outlay required.

Flexibility

Financing methods are exceptionally versatile. Agreements can be structured to suit many different situations. For example, residuals can be included. Payments can be skipped, increased annually - or decreased. Payments can be monthly, quarterly, half yearly or annually. Payments can be structured to suit income or payback periods.

FOURTH DIMENSION - INFLATION

During the last decade the eroding effect of inflation has reduced the Rand’s value enormously. Its purchasing power is constantly decreasing. Inflation increases the level of capital expenditures whereas vehicles acquired today avoid the probability of paying higher prices.

Often overlooked, however, is the impact of inflation on the finance method used and its long range effect on the company's capital. By

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simply incorporating an inflation factor in the cash flow analysis, two obvious conclusions can be demonstrated:

Inflation has a negative effect on cash flow when capital funds are used;

Inflation has a positive effect on cash flow when a financing method is used.

THE CASE AGAINST DEPRECATION

A cash purchase involves the partial recovery of the investment through depreciation. As a result of inflation, the cash value of depreciation recovery Rands continually decreases. For example, assuming a 15% inflation rate, a rand recovered in 4 years from now will have lost 60% of its present value. Your recovery rand will only be worth 40 cents.

THE CASE FOR A FINANCING METHOD

Quite the opposite is true in the financing situation. Instead if a continuing decline in the value of recovered capital, inflation continually decreases the net cost of any monthly payments. Four years from now you will no longer be making payments with rands worth 100 cents. They will only cost you 40 cents if we use the example above.

A PARADOX

If you utilise capital to purchase vehicles, inflation presents you with two negatives:

Funds reserved for purchasing assets continually decrease in value; and

The cost of replacement continually grows as prices increase.

So you have fewer Rands available for more expensive vehicles.

FIFTH DIMENSION - PROFITS ARE GENERATED

The value of conserved capital will vary from company to company. The benefit is dependent on your company's ability to employ capital productivity. In the words of an expanding successful retail chain, “The rand we invest in vehicles earns nothing. The same rand kept turning in merchandise generates our profit”.

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The most commonly used method of evaluating the return on conserved capital is the relation of net profit to net working capital. This method assumes that the average net return on working capital (calculated by dividing the after tax profit by working capital) will assign a realistic value to the capital that leasing conserves.

For example, if the average net profit on working capital is 20% it can then be assumed that each conserved rand will yield a net return of 20 cents annually.

Traditionally, with ownership as the objective, vehicles have been paid for in advance. With current financing methods, it is possible to obtain the use of the vehicle and match repayments with its service life.

SIXTH DIMENSION - TIME IS THE KEY

The rand has a measurable value that can be projected to any point in time. In terms of the present value concept, a rand invested today will continually increase in value. Conversely, a rand recovered in the future will be worth less than its current value.

If a rand were invested today in a 5% savings account, compounded monthly, it would have a value of R1.65 ten years later.

If the same rand was tied up in a vehicle, a reciprocal value would ensue - compound growth would be replaced by compound decline. Recovered ten years in the future, it would have a value of only 35 cents. This is its original value of 100 cents, less the loss of the compound earnings at 5%.

This is a simplification of the timing affect of an investment, but the concept is valid and is the analytical basis normally used by companies and banks in evaluating financing options.

One fact remains constant, whatever evaluations are done using a financing method, usually produces a superior cash flow throughout most or all of the base period. Ultimately, a financed vehicle will cost more in total Rands than purchasing, but it effectively defers the expenditure of capital. The timing of the net cash outlay, rather than the total expenditure is of paramount importance.

WHAT IS D.C.F. -

Ultimately a decision has to be made about the various financing options. This is a matter that raises much speculation. The best way to compare leasing, rental, Instalment sale, cash and full maintenance leasing is to use the Discounted Cash Flow Technique (DCF).

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FleetCUBE or your bank can assist you to do this using a relatively simple financial calculation. Very simply, all the different cash flows related to time are recorded. A financial discount rate is selected with you. The calculator then calculates the present value total of each cash flow. These totals are compared and a choice is made as to the most effective financing option. The lowest answer or ‘investment amount’ is usually the best choice.

SEVENTH DIMENSION - OBSOLESCENCE PROTECTION

Ownership often makes it difficult to replace vehicles prior to the time that wear and obsolescence becomes an economic problem. The main reason usually stated is that capital allocations for higher priced vehicles are not available.

Frequently, the vehicle’s actual economic life will prove to be shorter than its depreciable life. In such cases, funds accumulated for replacement will be less than adequate to finance replacement. An additional capital investment will be required. This is because proper costing and financing has not been done. Financing cannot, of course, prevent obsolescence, but it can make in-time replacement easier to achieve.

EIGHTH DIMENSION - ADDITIONAL ADVANTAGES

1. Cost Accounting

A financing method makes it easier to pinpoint costs very accurately. There are no hidden costs; the monthly repayment is the total capital expenditure. Furthermore, no expenditure is involved until the vehicle is delivered.

2. Realistic Life

The contract period can be matched to a vehicle’s anticipated life on a more realistic basis than depreciation may permit. This is particularity true in the case of group asset depreciation where various vehicles are all assigned a similar rate of depreciation.

3. Budget Expansion

Whenever a budget ceiling precludes the acquisition of a vehicle, it is frequently possible to provide financing to match whatever budget rands are available. This has proved to be beneficial to businesses that are traditionally restricted by inflexible annual budgets.

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Financing methods also allow for the acquisition of a vehicle costing more than is possible under purchase. A budget of R10 million allows that cash purchase of that amount only. Other financing methods would make it possible to acquire equipment costing many times more than R10 million.

4. Variable Payments

The stream of payments is by no means rigid when using a financing method. By accelerating or decelerating the payment stream or by special adaptations, payments can be structured in a variety of ways to meet differing needs.

Adaptability to specific needs is a feature of financial packages. The objective is to always structure your financing from the multitude of potential variations that will produce a greatest benefit to you.

TYPES OF FINANCIAL PACKAGES

Leasing

This facility allows you to lease an asset for an agreed period.. You have further options at the end of the period to continue leasing, or to sell, or to acquire ownership of the asset. VAT is capitalised at the start. Rentals are deductible for income tax purposes. The asset is on balance sheet.

Instalment Sale

This financing method is used when your initial intention is to obtain ownership of the asset. Initial payments and periods are negotiable. Depreciation may be claimed on the capital sum and interest charges can be claimed as a tax deductible expense.

VAT is capitalised at the start. The asset is on balance sheet.

Operating leases/ Rental Schemes

This financial package enables you to rent a vehicle over selected periods without acquiring ownership from the bank. The major advantage here is that VAT is not capitalised. It is included on each repayment and can be claimed as a VAT input. The asset is off balance sheet.

Full Maintenance Leasing

This is a financial package that provides the fleet owner with the vehicles of his choice at a fixed monthly rental. The rental includes finance, maintenance, tyres, purchasing and disposal of

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the vehicle. Replacement vehicles and insurance are other options available. Usually there are no rights entitling you to acquire ownership of the vehicle at the end of the period. The asset is off balance sheet.

A FINAL THOUGHT

Financing is not the answer to all your needs, but if your company:

can employ its working capital profitably; wishes to guard against obsolescence; finds that its current depreciation methods limit progress and profits; thinks the present conventional method imposes unnecessary restriction;

Then financing deserves serious consideration.

In the final analysis, management must ask itself this question: “Is the investment in a depreciating asset the best use for my capital? Is it better to capitalise the vehicle and pay for it out of after tax profits? Or will it be more profitable to lease the vehicle and pay for its use out of future pre-tax earnings?”

Each company’s needs are unique. Take time to solve your financial needs.

THE ESSENTIAL BENEFITS OF LEASING

1. It frees working capital for investments in the business;2. It could well cost less than other acquisition methods;3. Cash flows are improved, especially if residual values are

structured into the lease;4. It is an important hedge against inflation;5. It can ease obsolescence problems;6. Capital budget restraints can be eased by leasing to

acquire equipment;7. Repayments are from before tax earnings as opposed to

purchases which are made from after-tax profits;8. Repayments and periods are totally flexible.

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A SIMPLE GUIDE TO FINANCE METHODSPlease note that certain facts can vary from time to time based on current or local legislature

INSTALLMENT SALE

LEASE RENTALFULL MAINTENANCE LEASE

Initial Outlay

Corporate Buyer:No first rental usually required

Corporate Buyer:No first rental usually required

Corporate Buyer:No first rental usually required

Not required by law, but could be asked for by the bank

Ownership

Retained by the bank until final payment is made

Owned by the bank, but can be acquired. VAT is paid on deemed market value

Owned by the bank, but can be acquired. VAT is paid on deemed market value

Owned by FML company. Lessee cannot obtain ownership

Repayment

Corporate Buyer:Flexible payment structures possible

Totally flexible payment structures possible

Totally flexible payment structures possible

Usually only monthly payment covering all operating costs

Period Banks maximum is usually 60 months. If within Credit Agreement Act, maximum periods are laid down

Banks maximum is usually 6o monthly. If within Credit Agreement Act, maximum periods are laid down

No specific limitations. 60 Months is normally the bank’s maximum

No specific rules. Period and kilometers negotiable

AT Could be paid in cash, but usually capitalized into the agreement

Could be paid in cash, but usually capitalized into the agreement

Payable on each rental

Payable on each rental

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Taxation Depreciation allowance and interest is deductible

Total payments are tax deductible

Total payments are tax deductible

Total payments are tax deductible

Effect on Balance Sheet

Asset is capitalized and shown on the Balance Sheet

Asset is capitalized according to GAAP

Reflected as a note to the financial statements

Reflected as a note to the financial statements

Early Termination

Usually only 90 days after agreement starts, plus 90 days notice

Usually only 90 days after agreement starts, plus 90 days notice

Negotiated with the bank usually

Usually negotiated with the FML company

Insurance

Financial obligation lies with user. Comprehensive insurance usually required

Financial obligation lies with user. Comprehensive insurance usually required

Financial obligation lies with user. Compressive insurance usually required

Financial obligation lies with user. Comprehensive insurance usually required

End of Agreement

Ownership transferred to user

Vehicle can be returned or retained on an extended lease, or sold to a third party at deemed value, or traded in, or sold. Proceeds net of RV are rebated

Vehicle can be returned, or rental can be continued, or sold with the proceeds net of RV rebated

Vehicle can be retained. But cannot be sold to lessee, however, can be sold to a third party

Tax recoupment at end of Agreement

Applicable if sale value is greater than tax value

Applicable if: Lessee obtains ownership at below deemed value. Proceeds of sale are rebated to lessee

Applicable if proceeds of sale are rebated to user

Not applicable

Interest Rates

All rates are related to the market and maximums laid down in the Acts. Fixed and linked rates are available

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NOTE: If rates are peaking, then LINK. If rates have bottomed, the FIX

THE SEVEN SINS OF LEASING CAN BE A PROBLEM!

The use of leasing is still one of the best ways to finance the acquisition of vehicles. It is easy on cash flows and can be very tax effective. You pay for the use of the vehicle without depleting your working capital. But if you are not vehicleeful about structuring your finance method properly, you can run into a number of problems.

PROBLEM 1: THE WRONG AGREEMENTThe term Leasing is often used as a generic term to describe all the difference types of financing from a lease, a rental, an instalment sale and an operating lease. In real terms, each one has a specific purpose when it comes to financing vehicles. For example, financing a heavy truck would be very different to financing a vehicle. Just the different in-service lives of a truck tractor, the trailer, the ancillary equipment and a vehicle will require different methods to make the most effective use of the financing techniques.

In simple terms, if you want to use the vehicle beyond the finance period, use an instalment sale .If you want the asset off the balance sheet, use a rental (operating lease). If your aim is for the use of the vehicle at the lowest monthly payment, use a lease.

PROBLEMS 2: WRONG PERIOD AND RESIDUAL VALUEYou first have to work out your replacement programme for the different types of vehicles in the fleet. For example:

SALESMEN – three years and 150 000 kms MIDDLE MANAGEMENT – four years and 120 000 kms EXECUTIVES – five years and 120 000 kms

The finance periods should be tied into these categories to avoid the need for early settlement or extensions of the financial agreement. Either way, it will cost you money.

The residual value should be set in relation to the vehicles projected resale value at the end of the financial period. You don’t want to owe the bank more that the vehicles worth, but you also don’t want an unrealistically low value. As a general guide use a RV that is at least 10% less than it estimated future resale value.

PROBLEM 3: STRETCHING YOUR BORROWINGSFinance arrangements should not interfere with existing facilities such as overdrafts, term loans and LCs. Actually the most effective method

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is to negotiate a credit line for your vehicle financing as a separate facility. Consider FML to keep you vehicles off the balance sheet and maintain acceptable gearing ratios. Or you can go the vehicle allowance route for the same reason, provided this method is STRUCTURED and CONTROLLED PROPERLY.

PROBLEM 4: COMPARE PROPOSALS PROPERLYComparing rates from different banks is a very naïve way of making financial decisions. The only way to compare two quotes is to ensure that the periods, residuals and purchase prices are exactly the same and THEN compare the MONTHLY PAYMENTS. Small points such as linked/fixed rates, advance or arrears calculations, actual structuring etc., will all emerge. For example, a lease with a structure of 47 payments and a final residual payment will affect you differently compared to one with 48 payments and an additional last residual payment.

PROBLEM 5: OUT OF STEP WITH YOUR CASH FLOWSMonthly payments should be aligned to your cash flows, especially when financing trucks for income producing operations. Remember, financing is very FLEXIBLE. You can actually negotiate quarterly, half-yearly or yearly payments.

You can also STEP payments upwards or downwards. Payment periods can also be reduced or extended based on current needs. The point is, look at your business requirements carefully and then negotiate the best structured financial agreement with your bank. They all do it, but don’t often promote this aspect of financing.

PROBLEM 6: EARLY SETTLEMT PENALTIESYou do get a rebate of interest when you settle a finance agreement before its full term. Giving three months notice also gets you the full rebate. The problem, however, is that the settlement you owe the bank could be a lot more than the current resale value of the vehicle. This means extra costs for the fleet operations. Avoid this by ensuring that you select the most appropriate terms in relation to the use and replacement period of the vehicle.

When comparing financial quotes you should also ask for an example of a settlement figure at the 2/3 mark of the contract. You could be surprised at the difference between banks.

PROBLEM 7: SELECT A PROPER FINANCE HOUSESome years ago there were not too many financiers or general banks to choose from. It was “Hobson’s choice” to a large extent. However, there are many more options available today, with some “private” institutions offering far better financing arrangements or terms than the traditional general banks. The number of international finance institutions has also increased.

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So, if it’s a CREDIT LINE you’re looking for, take some time to look around when you think of financing your new vehicle.

A FINAL THOUGHT ON LEASING

Leasing is not the answer to all your needs, but if your company; can employ its working capital profitably; wishes to guard against obsolescence; finds that its current depreciations methods limit progress and

profits; thinks the present conventional financing imposes unnecessary

restrictions;then leasing deserves serious consideration.

In the final analysis, management must ask itself this question: “Is the investment in a depreciating asset the best use for my capital? Is it better to capitalise the vehicle and pay for it out of after tax profits? Or will it be more profitable to lease the vehicle and pay for its use out of future pre-tax earnings?”

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CHAPTER 6

ACCIDENT MANAGEMENT PROGRAMMES

This chapter will give you a description of the main types of insurance programmes and an outline of how to implement an accident management programme. For both programmes it is vital to maintain adequate statistics to evaluate policy and results in terms of accidents and the related costs.

The information covered in this chapter will help you to –

Understand some simple definitions related to the insurance industry

Explain some of the problems that you are likely to face when insuring vehicles Give brief explanations of the main types of insurance Explain some of the key issues to think about when

managing accidents Develop a fleet safety programme

SOME OF THE BASIC INSURANCE DEFINITIONS

COMPREHENSIVE INSURANCE – covers the following Accidental loss or damage to the vehicleLiability for damage to property belonging to other persons e.g. the other vehicleProtection for the driver against claims that may arise from death or injury to another personLiability Cover up to a certain value

THIRD PARTY ONLY ---- covers the following Your liability for damage to property belonging to other persons e.g. the other vehicleProtection for the driver against claims that may arise from death or injury to another personLiability coverIt does not compensate you for damage to your fleet vehicle and is not used by fleet owners

PASSENGER RISKThis is normally included in most types of insurance – up to certain preset limits

NO CLAIM BONUSThis is a discount given on the premium because no claims have been made on a vehicle during the year.Bonuses range from 0% to 50% depending on the number of years without a claim

EXCESS AMOUNTThis is the amount you have to pay each time a claim is made. These amounts are set by the insurance company in agreement with you

ACCIDENT MANGEMENT PROGRAMMESThese are very important programmes from a fleet management point of view. In simple terms the more accidents there are in a fleet, the higher the insurance premiums will be. It is very important to train drivers to drive properly and to know exactly what they have to do when they are involved in an accident. These programmes are intimately linked with insurance programmes. Vehicle insurance on its own is a rather technical subject and is usually handled by insurance brokers who place the insurance of vehicles with insurance companies.

FLEET INSURANCE

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In many companies the talk tends to be about motor insurance for the fleet. In the well run company, the talk is about Safety Management Programmes that encompasses everything from accident assessment; repairs; claims; excesses; premiums; to driver training and safety courses. In other words, it is a total programme NOT just insurance.

The vehicle manager can be certain that unless he actively controls and motivates his drivers, the cost of insuring the fleet will continue to rise each year. There has been a recent swing with many fleets sending drivers on advanced driver training courses in an attempt to reduce accidents and the cost per accident.

Some companies have been very successful, but it does need an overall plan in order to be successful and control these costs. One company of some 400 vehicles was able to reduce accidents by 50% over a period of 18 months with the costs per accident also being reduced.

THE PREMIUMS

The average expenses of an insurance company equate to 35% of premiums. This means that ONLY 65% of premiums are used to pay claims. Where a fleet has a level of predictable accidents, based on history, it usually results in a rand swopping situation i.e. the insurance company covers its repair costs simply by charging higher premiums the following year. Only the insurance company really benefits.

One of the problems with companies and their fleet operations is that accident statistics are not always available. These figures and facts are essential in order to negotiate the best insurance package.

INSURANCE OPTIONS FOR THE FLEET OWNER:

COMPREHENSIVE PLUS EXCESS PER CLAIM– This is the most common type of insurance and it is still used by nearly 50% of all fleet owners. However, it is usually inappropriate for a fleet of any size because it does not help manage accidents. What tends to happen is that the fleet owner simply pays whatever the insurance company asks, without looking for the causes of the increased premiums.

AGGREGATE EXCESS – The fleet owner is responsible for a predetermined amount of losses in any one-year. After the company meets this loss, additional losses are met through normal insurance. Catastrophe cover can also be negotiated for high value

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vehicles in case of a write off. For example, based on history/statistics it could be agreed that the company would bear all losses up to R500, 000 for the year. Claims in excess of this amount would be met by the insurer subject to an initial excess.

Calculating the initial figure e.g. the R500 000 mentioned above, would depend on your total accident management programme. The more effective it is, the lower the amount of money required for your fund and the lower your fleet operating costs.

RETROSPECTIVE RATING – This is based on the concept that the bigger fleet owner requires insurance for claims over R500, 000 but also needs the services of brokers and insurers to deal with third party damage claims. The fleet owner also needs to ensure that their own vehicle repairs are satisfactorily dealt with in respect of time and costs.

A deposit premium for the year is agreed. At the end of the year the insurers calculate a retrospective costing based upon an agreed formula and the necessary financial adjustments according to the cost of claims.

There are other types of insurance each with their pros and cons. The traditional “insure everything” approach however, is still being applied, but larger companies are retaining more of the risk themselves.

The cost of this risk and the type of insurance largely depends on implementing an effective safety and accident management programme. Repair costs are high, and this doesn’t take into account down time and other side effects. This is one area of fleet management that can produce significant cost reductions with the minimum of time and effort.

SELF INSURANCE

More and more companies are looking at the method of self insurance. It is not generally offered but the more business oriented insurance companies have made this type of insurance available in the market.

Self insurance is a more direct costing method, as the company’s own money is issued to create the initial insurance fund. There are different types of schemes, so be vehicleeful. Many are simply disguised comprehensive insurance schemes.

In the long run the fleet owner still needs the assistance of a proper insurance company, who should be able to structure a proper self

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insurance scheme. It would normally ensure the best cost structures and administration in respect of VAT inputs, tax, investments, 3rd party claims, “CAT” cover, accident assessment, statistics, training etc.

Whilst self insurance is highly cost effective, true long term viability can only be achieved if a company is doing it in conjunction with a registered insurance professional.

COMPANIES WANTING TO “SELF INSURE” THEIR VEHICLES SHOULD SEEK ASSISTANCE FROM INSURANCE COMPANIES TO STRUCTURE AND MANAGE ROBUST AND VERSATILE SCHEMES THAT CAN WEATHER TURBULENT TIMES.

There are certain reserves that an insurance company can hold that other companies cannot. Running self insurance on a fleet of vehicles without access to an insurance company’s facilities could be detrimental for a fleet owner.

Problems facing a self insured vehicle manager:

They do not have access to “knock-for-knock” agreements that exist between insurance companies, this means that in every vehicle accident involving a self insured party, someone will sue and someone will be sued.

They don’t have access to the professional reinsurance market and have to work through brokers, who charge commissions and who make use of the conventional insurance market which is usually more expensive.

They have to work on 12 month financial cycles while insurance companies are able to spread their risks over much more realistic 3 – 5 year cycles.

Long term and catastrophic reserving can only be produced by insurance companies.

The inherent risk of total self insurance is that one or two bad accidents or thefts can wipe out reserves and risk the future viability of a self funding arrangement. It is normal to have some form of catastrophy insurance to cover vehicle write offs. Only insurance companies have the legal status to assist companies to address these issues.

The cost of this risk and the type of insurance largely depends on implementing an effective accident management programme. Repair costs are high, and this doesn’t take into account down time and other side effects. This is one area of vehicle management that can produce significant cost reductions with the minimum of time and effort.

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ACCIDENT MANAGEMENT

On average, the accident rate in fleets range between 30% to 50%. In a fleet of 100 vehicles, this could mean that 50 vehicles are involved in an accident per year - at an average cost of nearly R25 000.00 for each accident.

It is a serious situation because fleet owners concentrate on insurance premiums, rather than the causes and control of accidents. It’s a bit like putting the “cart before the horse” - with fleet owners focusing on their annual insurance premium renewals with the broker, whereas the real need is to develop an effective accident management programme through proper driver training.

In simple terms, 50 accidents at R25 000.00 each, equals R1 250 000 not counting the associated costs related to down time, personal injury and loss of business.

Time and money spent on a driver training programme and fleet safety programmes will reduce these costs significantly and benefit all concerned. The obvious question has to be - “How much can this accident ratio be reduced?”

In the USA, the accident ratio was an extremely low 12.7 %. This in turn, relates to an accident ratio of 5.26 accidents per million kilometers traveled. In South Africa, the accident ratio is a very bad, one accident for every 70 000 kilometres travelled. The real question now is - “How is your fleet doing in comparison to these figures?” No doubt there will be lots to think about.

The point is that a proper safety programme must be implemented in your fleet, no matter how big or small. At the same time, targets must be set for your fleet in respect of accidents. Drivers must also be rewarded or penalized as part of your overall programme.

Recording of all accidents and the appropriate details is an essential part of the exercise. Most insurance brokers simply record basic data on a sequential basis as a means of establishing loss ratios. This is used to establish future annual premiums. However, the fleet owner needs to maintain his own records in order to evaluate matters from the accident and safety programme point of view.

The following table shows typical details that should be recorded on a quanterly basis for review by company management.

THIS IS AN EXAMPLE OF THE TYPE OF INFORMATION NEEDED TO CONTROL A FLEET ACCIDENT AND SAFETY PROGRAMME

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FLEET ACCIDENT RESULTS

QUARTER

YEAR

1. TOTAL VEHICLES 2. TOTAL KILOMETRES DRIVEN 3. AVERAGE KMS PER VEHICLE 4. TOTAL ACCIDENTS REPORTED:

PREVENTABLE ACCIDENTS NON-PREVENTABLE ACCIDENTS

5. PERSONAL INJURIES 6. FATALITIES 7. TOTAL VEHICLE DAMAGE 8. AVERAGE VEHICLE DAMAGE 9. TOTAL ACCIDENT RATIO/MILLION KM10. TOTAL PREVENTABLE ACCIDENT RATIO11. TOTAL NON-PREVENTABLE ACCIDENT RATIO

It goes without saying that other matters should also be evaluated in respect of accidents. For example, type of vehicle, driver, type of accident, time, place, type of work, etc. This type of detail is invaluable in establishing causes and trends and in which part of the fleet is having the most accidents.

Accident cost calculations and recording statistics

According to FleetCUBE’s calculations, an accident’s direct and indirect costs can easily amount to some R100 000. You need to have a method to do this calculation for every accident in the fleet. An example of the input required is given below.

Direct Costs to the OrganisationWorkers’ compensation benefits Health care costs Increases in medical insurance premiums Vehicle insurance and liability claims and settlements Physical and vocational rehabilitation costs Life insurance and survivor benefits Group health insurance dependent coverage Property damage (equipment, products, etc.) Motor vehicle repair and replacement EMS costs (ambulance or medivac helicopter)

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Vehicle towing, impoundment and inspection fees Municipality or utility fees for damage to roads, signs or poles

Direct Total R……………………

Indirect CostsSupervisor's time (rescheduling, making special arrangements) Fleet manager's time to coordinate vehicle repair, replacement, etc. Reassignment of personnel to cover for missing employees (less efficient) Overtime pay (to cover work of missing employees) Employee replacement Re-entry and retraining of injured employees Administrative costs (documentation of injuries, treatment, absences, crash investigation) Inspection costs Failure to meet customer requirements resulting in loss of business Bad publicity, loss of business

Indirect Total R……………………….

TOTAL COST OF ACCIDENT TO COMPANY

R……………………………………..Costs of Motor Vehicle Crashes to Employers Worksheet321. Senior Management Commitment & Employee Involvement

Accident management programmes need the active intervention of senior management. The carrot and the stick are two important parts of such a programme if costs, accidents and lives are important to the fleet owner. However, one of the biggest problems is the lack of statistics in the company. If there is one area in fleet operations that could be improved with some attention, it is in driver training and safety programmes.

FLEET SAFETY PROGRAMMES

These programmes are an essential part of driver management and must form part of the accident management programme.

‘YOU NEED TO MAKE A COMMITMENT TO YOUR SAFETY PROGRAMME.’

The key elements of a fleet safety programme that need to be considered to manage drivers and their vehicles are as follows

1. Senior management and employee involvement2. Formal accident committee3. Written policies

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4. Definitions of preventable and non preventable accidents5. Driver agreements6. Vehicle check records7. Accident management8. Costs and statistics9. Repair management10. Vehicle selection11. Disciplinary actions12. Rewards and incentives13. Driver training and communications14. Regulation compliance – fines and AARTO15. Promoting the programme

This area of fleet management has to receive a lot more attention. The first element of a fleet safety programme is a commitment to LOSS CONTROL. Everyone in the company – management, drivers and fleet managers - must demonstrate a strong commitment to safety.

Other elements include the proper development, co-ordination and implementation of your policy. This needs to include the objectives, purpose and performance standards, and well-documented reports.

When it comes to driving standards and the high rates of accidents, one wonders why fleet owners do not pay more attention to this aspect of fleet management, especially from an accident analysis point of view. All accidents need to be examined properly.

There are ways to overcome this. One way is to meet with the driver and find out if he or she lacks the basic knowledge regarding safe driving habits. Also investigate the accident thoroughly and document your findings properly. If you can, design your own reporting forms and charts. Keep them simple, but record all the facts.

It is important to discover accident TRENDS in order to identify accident patterns that may be developing.

Don’t rely on the insurance broker – their summaries are usually no more than a listing of events and costs. Very little information relating to accident control is ever included. It is important to discover accident TRENDS in order to identify accident patterns that may be developing. So the simple question has to be: “Did you identify a trend and if so, what action have you taken to educate, advise or warn drivers about these current driving hazards.

Another idea is to evaluate driving abilities and accident histories at the time the employee is hired. However, in the end it is up to –

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the Fleet Manager – to implement a proper fleet safety programme in the company. There is no one answer to these safety and accident programmes. It requires constant appraisal by the fleet manager, who also has to apply appropriate penalties and incentives for bad or good driving.

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CHAPTER 7

MAINTENANCE MANAGEMENT PROGRAMMES

Although maintenance is actually the lowest of all the operating cost groups, it is the one area of fleet management that causes the most problems. Drivers expect vehicles to run forever and they often miss out on services because of the inconveniences of being without their vehicle.

The information covered in this chapter will help you to –

Understand the problems you are likely to face if you try to manage vehicle maintenance on your own

Decide which out-sourced suppliers you can get to do this for you

Ascertain the advantages of doing this Know the two main types of services that are

offered Highlight the differences of these services

Having a vehicle off the road creates down time problems, products not delivered and sales persons not making calls or sales. Any vehicle that is not available for its specific purpose causes an increase in corporate overheads. It is as simple as that.

It is also a fact that a poorly maintained vehicle will also result in lower resale values. Selling a used vehicle with a proper service and repair record can definitely help you achieve better resale values. This in turn will lower the cost of depreciation which is one of the core objectives of cost effective vehicle management.

Fleet managers and administrators usually find that managing vehicle maintenance is always a hassle. The main reason for this is the difficulty the non-technical executive has in understanding what is being done to a vehicle or what should be done to a vehicle from a maintenance point of view.

THE FLEET MANAGERS PROBLEMS

There are eight general areas of maintenance management that usually cause fleet management problems. Each of these issues cause an increase in operating costs when not managed properly. You also need to remember that in a dealership, some 80% to 100% of overhead contribution comes from their workshop business.

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It is because of the following issues that you need to consider other out-sourced services from companies that offer Maintenance Management and Maintenance Plans.

TRACKING ACTUAL MAINTENANCE: Drivers are usually told to keep to the manufacturers requirements for services, which are based on kilometre intervals. If records are not kept on kilometres driven, it is difficult to control drivers and ensure that vehicles are serviced. The best method is to use a fleet card system which tracks kilometres as a by product of their reporting systems.

DISCOUNTS: These are available on parts and labour charges. The problem is they vary from dealer to dealer. They also vary between manufacturers. They can range between 2.5% - 25% depending on the fleet size. The problem is that not many people know what is available. Then, even if discounts are being applied, they are not properly monitored in the company’s accounting department.

INVOICE SCRUTINEY: There are very few fleet managers who can look at an invoice from a dealer and ascertain whether the amounts charged and parts allocated are correct. The difficulty lies in the dealer system of charging ‘time units’ for the work being done. It is difficult to know exactly what the correct number of units should be charged and at what the monetary rate is per unit.

Then there is the additional problem of the ‘lists’ of parts that are usually shown on the invoice. Other than a direct check with the dealer’s workshop, it is unlikely that you would know that the correct parts have been billed to you.

PAYMENT METHODS: These can vary from C.O.D. to credit cards or fleet cards. C.O.D. obviously means paying upfront with not much power to get a refund if the work is not done properly. Fleet Cards do allow some latitude in this respect.

AUTHORIZATION: Most companies allow a driver to spend an amount equal to the cost of a minor service on vehicle repairs and services without prior authorization. This is very unwise as it allows a driver to purchase other things that fall in this price range, e.g. batteries, shocks, exhaust pipes, etc. which are not authorised as necessary expenditure.

If anything the authority level should be set at zero but vehicle owners do not like this approach because of the internal work involved in managing maintenance. The biggest problem area will be the essential users who ‘tend’ to take advantage of any weakness in the company’s management systems.

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OVER / UNDER MAINTENANCE: The problem here is to decide what is over or under maintenance. The other problem relates to deciding whether the vehicle is it worthwhile fixing or not fixing. Many vehicles are over maintained to “keep them going” until they are replaced. Either way, poor decisions always lead to an increase in your maintenance costs.

WARRANTY CONTROL: The manufacturers usually sell vehicles with a warranty that covers certain parts of a vehicle in the event of them breaking. If repairs are needed, this work is done by the dealer. Most vehicles come with different types of warranties these days. They can range from 4 years and 60 000 kilometres, to 3 years and 120 000 kilometres. The agreements and what is covered, over what period will vary considerably.

It is extremely difficult to control a variety of warranties and their benefits with the work done by different dealers unless one has a proper knowledge of what these warranties cover. It is also a problem to ensure that you are not incorrectly charged for the work being done under warranty. It is normal to be charged for labour only but this needs to be carefully checked each time warranty work is required.

MAINTENANCE SCHEDULES: These schedules which state when a vehicle is due to be serviced also vary greatly between vehicles and manufacturers. Few managers, if any, know what the actual requirements are for specific vehicles in their fleet.

MAINTENANCE MANAGEMENT PROGRAMMES

One has to accept that there are some very real problems when trying to manage your vehicle’s maintenance. The only effect these problems have is to INCREASE maintenance costs. The best alternative is to find a company that provides either maintenance plans or maintenance management programmes. There is world of difference between a Maintenance Management Programme and a Maintenance Plan Programme.

The manufacturers provide Maintenance Plans within the price of their new vehicles. This is unique to South Africa. The fleet card companies and other fleet management companies usually offer Maintenance Management. The Full Maintenance Leasing companies of South Africa offer both schemes – with the maintenance plan usually built into their FML deals. The main differences in these two types of maintenance management services are shown below.

Maintenance Plans

Managed Maintenance

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Fixed price p.m. based on period/kms

YES N/A

Agreed period YES N/AAgreed kms YES N/ARisk with service provider

YES N/A

Risk with vehicle owner NO YESExcess kms charges YES N/AWork is pre authorized YES YESID card issued YES YESExtension of kms period Occasionally N/AFixed costs/risk free YES NOMonthly fee payable N/A YESFleet maintenance costs controlled

YES YES

Vehicle usage controlled by fleet owner

YESThe key benefit:Fixed costRisk free maintenance

YESThe key benefit:Properly management maintenance for a fee of about R35 per month per vehicle

SELECTION OF YOUR SERVICE PROVIDER FOR MANAGED MAINTENANCE

Obviously the costs of repairs and maintenance for a particular vehicle should be the same whoever manages your vehicles. In practice, this is not always the case because of the differing abilities of the company that provides either of these two services. Fee structures will also vary as will their purchasing power.

This can make quite a difference in your costs in terms of costs/ kilometre. As a fleet owner, you actually need to be very careful about selecting the service provider. In the long run, lower costs/ kilometre per vehicle is the ultimate test.

Generally, it makes good sense to use an outside company to manage the maintenance of your vehicles. They have the trained

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technical staff and resources to actually manage and control maintenance costs. They are also to interact with the dealers doing the work and, if necessary, the manufacturer. This ensures that the work is done properly and at the right price

A COST MANAGEMENT EXERCISE ON MAINTENANCE

Here is a pre-worked out costing exercise on one hundred vehicle’s maintenance costs over a four year cycle. You can use the same factors to work this out for your own vehicles.

Current costsAssume that your average maintenance on a vehicle is currently 22 costs/ kilometre or R550 over 2500 kms a month, then even a 10% reduction is worth R55.00 per month, per vehicle. On a fleet of 100 vehicles, this is equal to R264 000 over a four year life cycle.

Technically, you should be able to achieve this saving within your own company. However, by using an out-sourced management company, this saving can increased significantly. Look at these situations and the end results and then compare the potential savings with the R264 00.

Able to reduce downtime/prompt follow-up on job and partsThe average cost of a sales or service call is about R5.00. If downtime is reduced by quicker dealer service and proper maintenance management this could mean four less calls a year per vehicle. This reduction in costs is equal to R1.67 per vehicle, per month.

Provide proper maintenance scheduling guidelines and exception reportsIf these guidelines and reports are valid and a good reporting service is provided, costs will be saved. Preventing even four engine failures, out of the warranty periods, for a fleet of 100 vehicles will reduce costs by R25.00 per vehicle, per month,

Control unauthorised and unnecessary expenditureAll vehicle costs and life time expenditure can be properly controlled by trained personnel supported by real time fleet management computer systems. An estimated 30% of all servicing and maintenance expenditure is excessive. Proper control can reduce these costs by as much as R100 per month, per vehicle.

Costs reduced through volume purchasing arrangementsThe company managing your maintenance should have negotiated suitable parts and labour discounts. It should also offer nationwide purchasing at pre negotiated prices, on items such as batteries,

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shock absorbers, exhausts etc. This can be worth up to R17.50 per vehicle per month.

Intensive review of all invoices and if necessary warranty reimbursementAll unnecessary charges, such as ‘consumables’, should be eliminated. Strict control should be maintained on warranty work charges. This can mean a saving of approximately R33.00 per vehicle, per month.

Easy access to your maintenance management company by drivers and regional administrators

A toll free line can reduce costs considerably. It takes at least three calls to finalise a service or repair situation. A free line will reduce costs by some R5.00 per vehicle per month.

The service should also reduce your company’s administration time of the person(s) involved in controlling maintenance and repairs.

A full time person in your company should be able to control about 500 vehicles in respect of maintenance. On 100 vehicles a conservative reduction in personnel costs should be about R2.00 per vehicle per month.

There should be a significant reduction in clerical costs and related work

A one stop shop is provided by a management company. This leaves you free from work such as purchase orders, invoices, payments, queries, mailing etc. The reduction in costs is worth about R2.00 per vehicle per month.

The total savings will look like this -

Total savings per vehicle/month R186.17Total savings per vehicle/year R2 234.04Total savings for 100 vehicle fleet R223 404.00Total potential savings over four years R893 616.00

If you’re not achieving the above management and financial benefits – it’s probably time for some serious talking with your maintenance management company.

Managing vehicle maintenance doesn’t seem to be a major problem when it is the lowest percentage of a vehicle’s overall costs. The main point to keep in mind is that costs should be properly controlled in each area of vehicle management.

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OUTSOURCING YOUR VEHICLE MAINTENANCE MANAGEMENT PROGRAMME

If you decide to use an outsourced company use this guideline as an example of the level of services that should be offered by a maintenance management supplier. Use it to check on the current level of service being provided by your maintenance management company. Or, if you are already using these services, it will give you a good idea of the level of service you should be receiving.

MAINTENANCE AND REPAIRS EXPERTS. The company’s experts should save you time and money by

ensuring that only necessary maintenance and repair work is performed on your fleet vehicles.

They know when to question prices for parts and labour, and how long a part or component should last before replacement. As a result, vehicle downtime is reduced, and your drivers’ motivation and productivity are protected. Your people are back on the road quickly – at a competitive cost.

ESSENTIAL SERVICES TO BE PROVIDED The responsibility for repair and maintenance decisions are in

the hands of fully-informed, technically qualified maintenance professionals.

Controls your maintenance and repair expenses properly. Delivers flexible reports with all the information you need to

manage fleet maintenance and repair. Provides policy capabilities that can be uniquely tailored to

individual client needs. Provides efficient warranty capabilities that save money and

help ensure driver safety. Utilises a network of repair facilities that are quality-rated to

help ensure you get the right service at the right price.

A SIMPLE YET SOPHISTICATED SYSTEM When your drivers experience vehicle problems, they simply

call a Maintenance Assistance hotline. Emergency repair authorisations are also available

nationwide for non-working hours and holidays. As soon as a driver calls, a Maintenance Specialist verifies

complete driver vehicle information – including company name, vehicle number and description.

The system alerts the Maintenance Specialist if the vehicle is due for replacement, or if there is a replacement vehicle on order.

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The Maintenance Specialist is able to enter and view individual repair data while the entire vehicle history is displayed simultaneously. The system prevents duplications and identifies problem repairs.

WORKING WITH YOUR DRIVERS Maintenance Specialists guide your drivers as to which new

vehicle dealerships or independent service shops to use. In the event of an unexpected breakdown, you receive

emergency roadside assistance, 24 hours a day, 365 days a year.

Your driver receives repair and towing assistance, through the A.A.

After your driver takes the vehicle to the service facility, the service manager calls the company to discuss the diagnosis and estimate of repairs needed.

The Maintenance Specialist then carefully reviews the detailed maintenance history of the vehicle and negotiates the work to be approved.

WORKING WITH YOU The Maintenance Specialists negotiate and authorise all

transactions above and below the limits you have set for maintenance and repair job.

Any repair exceeding these amounts will be reviewed with you to determine the course of action you prefer.

Systems provide flexibility to meet your organisation’s specific needs.

After the work is completed, your driver signs the invoice and the service facility sends us the bill.

We thoroughly audit every line item to make sure that only authorised work was performed at authorised prices. You will never be asked to pay for service we do not authorise.

ONE MONTHLY ACCOUNT Apart from savings on maintenance, repairs, dealer selection

and warranties, we consolidate your driver maintenance and repair charges into one monthly account.

Instead of paying hundreds of invoices from locations all over the country, you pay a single account.

Every account is audited to verify that the proper vehicle was repaired and that only authorised work was performed.

We check to make sure that invoice numbers, kilometres, costs and line items all agree.

If there are any discrepancies, we correct them before the account is sent to you.

WARRANTY COVERAGE SERVICES

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It’s a tough job to ensure that you are receiving full warranty coverage on all repairs for your entire fleet.

Our Maintenance Specialists are specially trained and continually updated in the warranty coverage for all of your vehicles.

They ensure that all potentially eligible warranty work is performed by dealers under the guidelines established by each manufacturer.

In addition, every repair is screened for possible warranty coverage and special policy adjustments after the warranty has expired.

CLIENT-DRIVEN REPORTING Customised operating cost reports are designed to individual

needs and provide the information to effectively manage and monitor any size fleet.

These reports include: Expanded preventive maintenance exception reporting, Individual vehicle maintenance histories, Client expense and savings summaries, together with our

other standard reports.

A good maintenance programme has one single objective. Keep your vehicle on the road and at the same time, reduce your operating costs. Any company involved in this business should be able to show your tangible evidence of this.

THE BASICS OF A GOOD PROGRAMME

Puts the responsibility for repair and maintenance decisions in the hands of fully informed, technically qualified maintenance professionals to simplify the management of fleet repairs and maintenance.

Controls your maintenance and repair expenses. Delivers flexible, client-driven reporting with all the information

you need to manage fleet maintenance and repair. Provides policy capabilities that can be uniquely tailored to

individual client needs. Provides warranty capabilities that save money and help ensure

driver safety. Utilises a network of repair facilities that are quality-rated to

help ensure you get the right service at the right price.

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CHAPTER 8

REPLACEMENT POLCIES

Poor replacement policies generally have an adverse impact on fleet operating costs, especially in respect of depreciation costs. There is a very simple reason for this. It is because there is an optimum point in the life cycle of a vehicle when its costs have reached an anticipated maximum level, and it will obtain an acceptable resale value in the used market. A vehicle should be replaced at this point. If this point in a vehicle’s life is missed you will usually incur additional costs and downtime.

Th

e information covered in this chapter will help you to –

Understand what the normal fleet replacement policies are.

Show you that you need to plan well in advance for capital expenditures.

Explain that you need to plan well in advance for purchases when replacing vehicles.

List out the various issues that you need to consider when setting up a fleet replacement policy.

Use the formal, technical method to calculate the optimum time to replace a vehicle.

Use the formal method to assist in vehicle selection, decide on ‘repair or replace decisions.

Use these facts to calculate the maximum amount to spend on maintenance in the next operating year.

Replacement policies in conjunction with the buying and selling function can affect at least 30% of your total costs for better or worse. Anyone who is reasonably conversant with the principles of fleet management will also realise that “Replacement” is only one of the aspects that require attention and control. Unless the other matters are also given proper attention, the setting of Replacement policies and their subsequent implementation will fall short of achieving any desired objectives.

Although a proper policy can produce good cost reductions, it is also the one area where decision making is probably the most difficult. The reason being that, apart from the pure theoretical approach, proper replacement policy must also give serious consideration to matters such as: time and distance, obsolescence,

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costs, market demand, engine size, second-hand prices, economy, stock situations, market location, model year, etc.

GENERAL REPLACEMENT SITUATIONS

Some years ago, fleets used to replace vehicles after about three years and 100 000 kilometres. As new vehicle prices increased at about 12% a year on a regular basis, fleet owners were under pressure to find the funds to purchase their new vehicles. Then in one year in the 1980s prices rocketed up by 25%. It was the trigger that set off longer replacement periods with 4 years becoming the norm these days. Some thing similar happened in the US when fleet replacement policies moved out to a three year cycle.

There are any number of variations within companies, for example -

Representatives = 3 years / 120 000 kms. The average month kilometres being 3500 kmsGeneral fleet drivers = 4 years / 120 000 kms. The average monthly kilometres being 2500 kmsExecutives = anywhere between 4 years / 120 000 kms and 5 years / 120 000 kms

MAINTENANCE COSTS

Something that has a direct effect on replacement timing is maintenance. It is a proven fact within the fleet management industry, that these costs escalate between 100 000 kms and 120 000 kms. In general terms, keeping a vehicle much longer will simply increase maintenance costs out of proportion in terms of costs/ kilometre. Although a vehicle still has to have its regular services to maintain it, it is around these higher kilometres that parts start to wear out and need to be replaced. This is when costs start to increase, almost in an exponential curve.

RESALE VALUES

As a vehicle gets older in terms of years and kilometres it loses its value. However the condition of the vehicle also has a major impact on its resale value. A vehicle can be the same as another one, in terms of age and kilometres, but if it has not been properly maintained and is in a poor condition, its resale value will be marked down accordingly

PERSONNEL CONSIDERATIONS

Another important aspect to consider is the company employee who has to use a vehicle as part of his job. Trained people have to be

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retained for the benefit of the company. If you tell someone to drive a vehicle for six years before it is changed, the person is very likely to change jobs for a better vehicle scheme. To a very large extent, vehicles are a status symbol amongst drivers. Most drivers want to be able to drive the best vehicle possible. There is always pressure on a company to provide the best, newest vehicles.

CAPITAL REQUIREMENTS

Operating divisions inevitably need additional capital for growth and this might mean that there are insufficient funds available for the purchase of vehicles. This could be to the detriment of the fleet unless financial resources are allocated to replacement requirements well ahead of anticipated expenditure.

VEHICLE SUPPLY SHORTAGES

The manufacturers are very cautious about extending production ahead of firm orders. Dealer allocations of stock vary from month to month. This means that replacement planning could be adversely affected unless your new vehicle orders are placed well in advance. If you are the victim of supply shortages when you actually need new vehicles it will increase your problems in managing your fleet and trying to control costs.

The important thing to remember is that a lot of forward planning will be needed to minimise these basic problems. Each company has its own characteristics, industry environment, and forward planning and capital structure. These all impinge on the fleets operation and replacement planning.

USE OPTIMUM PERIODS

By far, the biggest savings in fleet cycling are obtained by running a vehicle for a least four years, i.e. 120 000 kilometers based on an average annual 30 000 kilometers. The difference in cost between one year cycling and cycling over longer periods of between two and four years is accounted for by the extremely high cost of first year depreciation. This is a cost that has escalated at a significantly greater rate over the last five years than has depreciation for other replacement cycle periods.

DOWN TIME

In theory, the cost of downtime is limited by the availability of a substitute or rental vehicle. Projections should however take into account downtime costs by also using estimated costs for additional days of vehicle rentals especially for vehicles in the higher kilometer ranges.

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However, what is not taken into considerations is the possibility of greater inconvenience or unreliability which is likely to be the case with a vehicle operating in kilometer ranges above 120 000 kms.

Moreover, it is likely that vehicles operated into substantially higher kilometer ranges would be less safe, i.e. there is a greater chance of some component failing which could make the vehicle riskier to drive.

While statistically any degradation in the safety of a high kilometer vehicle might be extremely low, it would nevertheless still be greater than would be the case with lower kilometer vehicles unless preventative maintenance schedules were adhered to diligently.

REPLACEMENT CYCLE OPTIMIZATION

Replacement cycling is optimized through judicious personal intervention within the framework of a specific policy. For example, used vehicle market conditions and other variables might suggest replacement at slightly less than a stated month or mileage maximum such as 36 months or 90 000 kilometers and sometimes at points slightly in excess of the replacement guidelines.

Let’s say that a vehicle is due to hit its 90 000 kilometers in August of a given model year. It might be better to replace it in June with fewer kilometers than the guidelines suggest, i.e. before the potential +/-3% price increase. Another option would be to hold off replacing it until January (when a new model year begins) thus making the replacement at slightly higher than the recommended maximum.

Individual judgment on particular vehicles would dictate which of the two alternatives is preferable. No matter what month or kilometer maximum might be stated as a working policy, you should not adhere to this blindly.

When announcing your policy to vehicle operators and division management, you might want to state in terms such as “Vehicles will be replaced within a maximum of 36 months in service, with earlier replacement depending on accumulated kilometers, maintenance experience and other factors which affect operating cost patterns”.

This type of stated policy does not commit fleet management to replacing vehicles at a kilometer maximum which might not be in your best interest. However, to do this properly, you need to apply

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the full theory of replacement, taking all the pertinent factors into account.

DATA RELIABILITY

One of the critical points in determining the volume of additional maintenance which might be required for operation of a vehicle between 80 000 and 160 000 kilometres is the amount of preventive maintenance done in the first 80 000 kilometres. FleetCUBE can provide the necessary current maintenance costs for all South African vehicles up to 200 000 kilometres

The payback on preventive maintenance is realised in the second incremental 80 000 kms. Thus, the issue of additional potential vehicle downtime becomes a function of not only the maintenance experienced in the second 80 000 kms, but also how often the driver is willing to put a vehicle into the workshop at the dealer during the first 80 000 kms of travel.

SOLVE THE REPLACEMENT PROBLEMS WITH GOOD DECISIONS

Listed below are some of the aspects you should think about and apply in planning your vehicle replacement cycles:

Use your own statistics and industry trends and calculate your optimum replacement timing. Use it as a guide.

Study the used vehicle market and get facts as to where the best prices are being obtained in the country for used vehicles.

Remember, the model year concept. A vehicle purchased early in the calendar year gives you more opportunity to amortize depreciation costs. If possible, plan for your major purchases in the early part of the calendar year.

Obtain early commitments for capital allocations for vehicle purchases.

Consider the various financial alternatives if capital is not available. For example, leasing, rentals, full maintenance leasing and instalment sale.

Select vehicles which will give good resale values. Try and get back to normal economic replacement cycles as

soon as possible. The incremental costs for even small extensions are usually high in terms of extra costs/ kilometres maintenance costs. Play the end game vehicleefully. It calls for a stop to non essential repairs and maintenance once the replace decision has been made.

Review your fleet and try to move the vehicles in the worst condition first.

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Do not be tempted to keep vehicles because “they look alright”. Unexpected repair bills will always leave the thought “I should have replaced earlier”.

Ensure that the vehicle to be replaced is available when you need to sell it and not on a week long trip in the country.

Plan the new vehicle delivery well in advance. Do not rush into the dealer at the last moment and expect immediate delivery. If at all possible, plan to order new vehicles at least one month in advance.

Do not spend hours and hundreds of Rands negotiating that extra half percent discount while throwing away anything up to R10 000 on your second hand unit simple because of a lack of attention to replacement policies.

Planning replacement cycles has never been easy, especially when you are constrained by economic factors. However, whatever you do as a fleet operator make sure you are not storing up problems for your next round of replacements. Learn your lessons and learn them well.

THE PROPER THEORETICAL APPROACH TO REPLACEMENT TIMING DECISIONS

The following approach and method was researched and scientifically proven by the UK Royal Institute of Operations Research. It is recommended as the best method to use. It is applicable to passenger vehicles and commercial vehicles.

Assume the vehicle is three years old and the fourth year is under review:

STEP 1:Calculate the vehicles average cost of actual market depreciation for each year in rands

Purchase Price - R140 000Year 1 depreciation - R 35 000 = 25%Year 2 depreciation - R 14000 = 10%Year 3 depreciation - R 10 500 = 7.5%

STEP 2:Calculate the average annual costsYear1 R35 000Year2 R24 500Year3 R19 833

STEP 3:Calculate the vehicles average cost of repairs and maintenance for each year

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Year 1 costs - R1 920.00Year 2 costs - R2 280.00Year 3 costs - R2 670.00

Year 1 average 1920 1 = R1 920Year 2 average 1920 + 2280 = 4200 divided by 2 = R2 100Year 3 average 4200 + 2670 = 6870 divided by 3 = R2 290

STEP 4:Combine average annual costs for each year ProjectedDepreciation 35 000 24 500 19 833 19 000R+M 1 920 2 100 2 290 3 800TOTAL 36 920 26 600 22 123 22 800CONCULSION:Costs have bottomed out in the third year. IT IS TIME TO MAKE A REPLACEMENT DECISION!

USING THE COST LIMIT METHOD TO MAKE A REPLACEMENT DECISION

THE COST LIMIT METHOD

The rationale behind this method is that the best time to replace a vehicle is at the point in its life when:

the total cost to date of depreciation and maintenance divided by the age of the vehicle is at a minimum

The factors affecting costs of different vehicles will vary even within the same group. The method is therefore based on regular reviews to see whether the minimum annual average cost (MAAC) has either been reached or passed.

The method has a number of pertinent advantages:

the TOTAL costs of the vehicle since date of purchase are taken into account the ACTUAL repair and maintenance costs are used rather than assumptions it is applicable to a wide VARIETY of situation in

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both large or small fleets, with or without in-house workshops

OUTLINE OF THE METHOD

The basic principle is that vehicle should be replaced when their individual costs - averaged out over their lifetime are at a minimum.

STEP 1:Is to determine the maximum amount that can be spent on each vehicle during the coming year, if the averaged out costs of owning and operating the vehicle is not to increase. The figure is referred to as the COST LIMIT.

STEP 2:Is to estimate the expected repair and maintenance costs for the coming year.

STEP 3:If the estimated costs are greater than the COST LIMIT, the vehicle should be replaced. Alternatively, if they are below the COST LIMIT, the vehicle should be kept for at least another year.

Reviews can be made at anytime, but not much advantage would be gained by making reviews more than twice a year.

ESTIMATING DEPRECIATION

Depreciation percentages or Rand figures must be estimated as accurately as possible, and it is recommended that market value and not book value be used. As already indicated, a knowledge of the second hand market is necessary in order to project realist figures.

ESTIMATING REPAIR AND MAINTENANCE COSTS

There are two methods for estimating the next years costs:

AN ENGINEERING ESTIMATE - can be made of the likely repairs that will be necessary, with a further amount added to cover any routine age-dependant costs that will be incurred.

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A STATISTICAL ESTIMATE - can be made, based on vehicle history, provided a good control system is in force. In many companies, however, these figures are either not available, or are suspect, and force one into making guesses.

The estimate costs are then compared with the COST LIMIT. If they are higher, the vehicle should be replaced and vice versa.

OTHER FACTORS

Two other factors worth considering in conjunction with these calculations are INFLATION, and the RISK of increasing costs, if the projected replacement timing period is exceeded.

INFLATION:Although this can be built into the theoretical calculations, it does complicate matters if simplicity is required. Inflation will affect two main areas:

The price of new vehicles and the price of second-hand vehicles, e.g. the constant price increases tend to flatten the depreciation curve of existing vehicles.

Other Factors Continued....

The cost of repairs and maintenance will increase in line with economic indicators.

As these two costs affect the replacement calculations, correct cost information and projections become very important.

RISK:It is essential to acknowledge that once the calculated replacement point has been passed, the risk of incurring unexpected, costly repairs is possible. Furthermore, a simple calculation will show you that amortising this additional cost is almost impossible, within an acceptable additional period usage.

The object of the policy should be to reduce the RISK factor to endure the minimum increase in operating costs. The Cost Limit Method helps to do it.

There is no simple answer to Replacement Policy, but the COST LIMIT approach will serve as a good guide. Whatever you do, try to be objective, and do not let management force you into

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policies which are not based on correct fleet management principles.

HOW TO CALCULATE THE MAINTENANCE COST LIMIT

This is an example of a calculation based on the cost limit method explained above.

TO CALCULATE THE ANNUAL MAINTENANCE LIMIT

VEHICLE COST – R100 000.00

24000 kms per year

R + M is recorded to date as 24 c/km

DEPRECIATION IS 50% over 4 years

DEPRECIATION IN 5TH year is R5000.00

R50 000.00 + R23 040.00 ÷ 4 YEARS = R18 260.00 – R5000.00

R13 260.00 IS THE COST LIMITOr how much you can spend on R+M in the next twelve months

USE STATISTICS OR ENGINEERING ESTIMATE TO PROJECT R+M COSTS FOR THE NEXT YEAR

There are various replacement strategies that can be applied. The important thing to remember is that there is usually more than one correct solution. Each company has its own characteristics, industry environment, forward planning and capital structure. These all impinge on the company’s vehicle operation and replacement planning.

In fact, when there is a change in the economy and operating environment, try to apply some ZERO BASE thinking to your fleet management problems. Throw out old ideas and assume that anything old is no longer valid. Reassess your policies from a new stand point. You will be surprised at how many options there are when it comes to planned replacement cycles.

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CHAPTER 9

USED VEHICLE MARKETING

Selling used vehicles is probably one of the most important tasks that a fleet manager will ever have. Apart from all the other things that have to be managed and controlled, selling a used vehicle at its best market price will usually save more money than anything else you ever do in terms of vehicle management.

The information covered in this chapter will help you to –

Understand the importance of selling used vehicles at the right price.

Know what the important economic facts are in respect of the used vehicle market.

Find the right information on this market Set your reserve prices and decide on what make-

good costs to incur. Understand the importance of reconditioning costs. Make decisions on the best method to use to sell

used vehicles

This function of fleet management goes hand in hand with correct replacement timing. The difference between the purchase price and the resale price i.e. depreciation, is usually the biggest cost factor in a fleet. Obtaining the best resale prices has a direct impact on these costs. You might save 1% or R1 800.00 on a better discount when buying the vehicle but you can lose many thousands of Rands when you don’t sell used vehicles properly.

THE CORE DIFFERENCE IN TERMS

Much more than semantics separates the terms “Marketing” and “Disposal” as they relate to used vehicle sales. Disposal implies the indiscriminate removal of useless waste. The term marketing more accurately describes a controlled and informed process through which a used vehicle is converted to cash.

Your goal during this process is to achieve the highest available price in the shortest practical period of time. The actual transaction should also be accomplished at reasonable expense, provide an acceptable level of security and comply with all the necessary regulations. At the same time, neat and accurate documentation should be a by-product of these transactions. If that sounds like a tall order, it is. Especially when one considers that you are dealing in an area of the motor industry that generally creates feelings of mistrust.

THE USED VEHICLE MARKET:

This market place is essentially a nationwide arena in which buyers and sellers meet to exchange goods. This market is very cyclical as well as seasonal. The market is subject to pressures of supply and demand and is sensitive to price and geography. The used vehicle market, and truck market goes through good and bad phases.

The market also changes because of credit restrictions and interest rates. It is also important to understand that the market for a specific vehicle may consist of a wide range of values rather than a clearly defined, easily determined single value. However, in the end, the value of a specific vehicle can be more directly influenced by its condition, location, kilometre reading, option content, colour and method of sale.

It is very important to plot the used market trends for the different vehicles in your fleet. Where possible you should incorporate economic trends as well. It is very important to keep close to this market if you want to control your total operating costs.

MARKET GUIDES:

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The variety of factors that influence the market generally cause fleet managers to look for the help of a reliable guide book in determining the value of your vehicles. All guide books need some interpretation. A guide book becomes most useful when you fully understand the relationship between the prices in the guide book and the actual sales results.

For example, if your vehicles consistently sell at 90% of the ‘book price’, or R5 000 above the ‘book price’, you can develop a formula based on your local guide book. The relationship between the printed prices and the actual sales results will seldom be constant for all makes and models. It is essential for you to apply your own judgment and experience when using a guide book to determine the possible selling price of any vehicle.

SETTING YOUR RESERVE PRICE

One of the most important calculations to do, prior to selling a vehicle, is to set its reserve price. This is the price you will be using to negotiate its eventual price in the used market. If you get this wrong, you will lose money and your depreciation costs will be higher than they should be. It’s as simple as that – in the end.

You need to use a Used Vehicle Condition Report to record the prices, make good costs and the vehicle information.

STEP ONE - set a reserve price for the vehicle. This is the minimum price that you calculate the vehicle should be sold for. If you go to the market and ASK for a price, you will always be at the mercy of the buyer. You must do your own homework first and get the right information. You must also use previous sales of your own vehicles as a guideline.

Guidebooks are published in the market which gives prices on the market trade in values of vehicles. They take into account the age of a vehicle AND the annual kilometers. These are the best guidelines to use to set an initial reserve price for the vehicle.

STEP TWO – will be for you to assess the condition of the vehicle and decide whether it needs any specific repairs to put it into an acceptable condition for resale.

All vehicles suffer “wear and tear”, but anything excessive like a cracked windscreen will reduce its resale value. The guidebooks actually give standards as to what constitutes “acceptable condition”.

STEP THREE – will be to decide how much to spend on repairs, and finally to set a reasonable RESERVE PRICE with which to approach the market. The main objective at this point is to decide on the ‘lowest

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amount that should be spent’ to achieve the highest selling price. For example- your repair or make good costs could be R5 000. The question is - Should you spend the whole amount and hope to get it back in resale terms?’ – or – Should you only spend R1 500 on the cracked windscreen and then increase the resale price by R3 000? The second option is usually the better of the two.

THE DIFFERENT METHODS OF SELLING VEHICLES

Many companies find out sooner or later that selling used vehicles is easier said than done. Even the experts battle to meet their book values or obtain optimum prices for used vehicles.

Strange as it may seem, vehicles in use are accepted as assets, but as soon as the new vehicle is ordered, the old vehicle is looked upon as a liability and an inherent cost, to be minimized with almost indecent haste. Not surprising, because in many situations the vehicle has been kept for too long and to quote an old euphemism, “It’s costing money!”

Obviously, if not traded in against the new vehicle it can cost even more money until sold. If your used vehicles are stored for a future auction, you bear the cost of outstanding money. There is also the very real problem of these vehicles being stripped to some extent. This will obviously reduce their eventual resale value.

So selling the used vehicle needs careful thought because of the many options that can be followed. For example, retailing, selling to staff, auctions, lot sales to dealers, tenders and trade-ins. Whilst there is not right or best way, the problem is usually exacerbated because of the overall lack of planning within the company.

Like most situations however, if this aspect of vehicle management is inherent in your policies and clear goals have already been established, the decisions become easier. In the final analysis one is dealing with the cost of deprecation which usually runs at 30% of total operating costs.

Previous decisions in respect of vehicle selection, use and care, maintenance control, timing of purchase and projected disposal timing, all affect the cost of depreciation. An example of this is a very large USA fleet, purchasing 2000 replacement vehicles for the New Year. The final selection was made on the basis that vehicle model A would realize $50 more after 3 years of use, than vehicle model B. A saving of $100 000.00 was eventually realized after the three year in-service period.

There are different methods which can be used to sell used vehicles. As you read about these methods, think back to your own experiences

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and try to analyze what you think is the best method for your own vehicles.

RETAILING

If one could sell vehicles, immediately they are no longer required and obtain the going retail price, this would be an ideal situation. Unfortunately this method is seldom possible. Unless the company is big enough to operate a used vehicle outlet with its substantial overheads, it could mean incurring holding costs, advertising costs, road worthy costs, not to mention many others, all of which reduce the final value of the used vehicle. This is not a practical method for fleet owners.

SALES TO EMPLOYEES

Sales to employees is the most widely used method in companies. This method represents at least 50% of all vehicles sold in the market. It will continue to be the first choice. Nearly everyone agrees that company employees will pay more money for a used vehicle than anybody else. The answer is simple. If anyone knows the vehicle well it will be the driver, after all he has had the benefit of driving the vehicle over the previous three years.

It is still important that the right price be asked for these vehicles. In some companies these vehicles are given away at a very low price. For example - 20% of original purchase price.

Unfortunately, this pricing structure has a direct effect on the depreciation cost carried by the company. It makes more sense to set the price at some percentage below the book trade price e.g. about 10%, bearing in mind that it is a fleet vehicle. The employee will get the vehicle at a reasonable price but not at a totally discounted price. It is important, when selling vehicles this way, to develop strict controls regulating eligibility, pricing formulas and acceptance requirements. This will ensure that it is fair to all employees who are eligible to purchase these vehicles.

It could be a good idea to shift the administrative burden of sales to employees to your fleet management or consulting company. If you do retain control of this function yourself, remember to compute the value of your own time and consider the physical limitations of your storage, display and sales facilities, as well as company policies regarding insurance liability.

TRADE-INS

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This has become an established practice over the many years, and basically consists of offering the used vehicle as a trade-in to the dealer supplying the new vehicle. In essence, it is simplicity in itself. A price is negotiated, some paperwork completed and your used vehicle disappears into the vast maze of the motor industry.

However, it is this very element of convenience and simplicity that lulls many fleet operators into a false sense of security. It is not unusual to find used vehicles being sold as much as R15 000 below their proper values.

Of course, the dealer is not without his own problems and his ability to absorb the used vehicle can be affected by all kinds of circumstances. For example, his current stockholdings where he might have too many vehicles of the same type that he is trying to sell. Then there is the acceptability of the vehicle in the second hand market which could make it difficult to sell.

His financial strength to buy in more used stock could be limited. Dealers have to carry the cost of vehicles standing on their floors and he might not be able to accept more stock. Will it be classed as a trade vehicle or will sell it through his own outlet. Three year old vehicles with high kilometers (+90 000 km) are usually not the stock they are looking for - two to three year old vehicles with lower kilometers (60 000 - 80 000 kms) might be more in line with their used vehicle policy. The dealer is seldom able to give good discounts and good trade-in values.

Higher than normal trade-in values, sometimes referred to as an over allowance, usually mean an offset against the normal discounts and vice versa.

WHOLESALERS

The wholesaler is a dealer who primarily buys from a dealer and on sells to other dealers rather than to the public. The best wholesalers provide many of the same advantages that retail dealers do. They can be very quick in the pickup and sale of vehicles and they have internal costs that are sometimes lower than those of auctions or retail dealers. This is an option for the disposal of vehicles, but it is one that needs to be watched very carefully to ensure that all financial and administrative arrangements are according to your own requirements.

TENDERS

This is used by companies who offer a “parcel” of vehicles to used vehicle dealers who then submit a tender price for the offered vehicles. It is not good method because vehicles need to be sold individually, taking into account their reserve prices. When vehicles

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are put together in a “parcel” you are unable to optimise their individual resale values.

Also, vehicles need to be sold quickly to reduce depreciation costs. This method means that vehicles are kept in the company until a number of vehicles can be sold together. This delays payment for the vehicles. There is also the likelihood that you could be ‘manipulated’ by a ring of buyers resulting in lower prices over the long term.

AUCTIONS

This is probably the most cost effective method and as such is used a lot by international companies. Its biggest advantage is that it gets the vehicle to the general market and the dealer market with the potential to sell it quickly and easily at a market related price. The actual process is quite simple.

You first set your reserve price as explained above. Select the auctioneer you want to use to sell the vehicle, based

on their track record and overall services. Confirm the reserve price based on current sales of the vehicle. Agree the commission to be charged. Usually about 4% of the

selling price. Agree the payment period after the sale. Usually 7 to 14 days. Finalise the administrative arrangements. These will cover matters such as:- Vehicle collection – immediate insurance cover – collection fees –

valet - make good or agreed repair costs – agreed to after a vehicle evaluation report by the auctioneer – when the vehicle will be put up for auction – when confirmation of the sale will be made.

Each of these remarketing methods should be carefully evaluated from a vehicle management point of view. It is worthwhile repeating that your main objective here if you want to control your depreciation costs properly.

USED VEHICLE RECONDITIONING

Condition accounts for the different in value between a flawless original worth its weight in gold and a twisted lump of metal worth two cents per kilogram.

Taking into account the many factors that affect the value of a motor vehicle, the most important element will usually be the condition of the vehicle. While factors such as location, kilometre reading, colour and the date all affect the selling price, no other factor has a significant on impact on the sale price as condition.

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The term “reconditioning” means the process of restoring a vehicle to optimum saleable condition. For practical purposes, this will most often mean the representative condition for its year of manufacturer, kilometres travelled and intended use.

A fleet owner may invest a significant amount of money or nothing at all on a specific vehicle. This is an important decision in the reconditioning process. This process can be defined as – the judicious application of time, effort and money intended to increase the selling price of a vehicle, by significantly more than the value in Rands of that time, effort and expense.

IN-SERVICE MAINTENANCE AND RECONDITIONING:

It is obviously better to maintain the showroom appearance of a vehicle by pampering it throughout the term of ownership, rather than spending a lot of money to recondition it at replacement time. Regular preventative maintenance and cleaning are usually more than enough to merit a clean rating for the vehicle when it is time to trade.

Drivers should be encouraged to maintenance their vehicles properly through regular field inspection of vehicles. Even consider introducing penalties against drivers who abuse their vehicles. Insist that body repairs performed while the vehicle is still in service be of extremely high quality. Poor repairs for accidents will detract from the vehicles ultimate resale value. Body repairs should be free of ripples and paint should match perfectly.

It is important that the vehicle be thoroughly cleaned before selling it. Cleanliness is especially important at this time because it will help the new vehicle dealer to recognize the profit opportunity in the reliable trade-in vehicle. It has the effect of allowing you to reap immediate benefits from your in-service reconditioning programme.

DECISION MAKING

Deciding how much and what type of reconditioning to perform is vital. You should have a clear idea of what you are trying to achieve. Intuition can be a valuable guide, but try to be responsive to the market to which you are offering your vehicles, rather than trying to force the market to conform to your personal preferences.

HOW MUCH

Too much or too little reconditioning will affect the final sale price. Reconditioning must add value or significantly aid the sale process. Reconditioning which merely returns its own costs i.e. where you spend say, R2 000 on repairs but don’t improve its resale value, is a

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waste of time and effort. Before you decide what to do, consider factors such as the vehicles present condition and value, its age, model, kilometres and expected cost and duration of the required reconditioning.

TARGET MARKET

Equally important is your targeted market within the used vehicle market place. Remember that there are times when spending nothing at all is most advantageous. The target market to which you will offer your vehicle will have significant effect on your reconditioning decisions.

If you intend to retail the vehicle directly to the public, or sell it to a dealer who intends to retail it, you are more likely to encounter a buyer who prefers and will pay for a full reconditioned unit. If you intend to wholesale the vehicle, you will more likely be selling to dealers who make reconditioning their business.

TOTAL COSTS

Reconditioning expenses can be very high. It has been estimated that rebuilding a vehicle from parts can cost about seven times the original purchase price. Repair costs needs to be assessed accurately before any work is undertaken. It is important that the cost of repairs be related to the total value of the vehicle before and after reconditioning.

The costs of labour and material are just as high for older vehicles as for newer vehicles, but the total costs of repairs represents a much higher percentage of the total value of the older vehicle. For example - a R200 000 vehicle with a repair bill of R6 000 represents 3%. Whereas the same amount on the used vehicle valued at R100 000 represents 6%. Older vehicles are also more likely to sell within a narrower range of values.

PERFORMING THE RECONDITIONING

The reconditioning choices that you make tend to fall into different categories. For example, you may wish to repair a dented bumper, replace a broken windscreen touch up some paintwork or remove a tow bar. Concentrate your efforts where they have the biggest pay off.

A good appearance normally has the greatest impact and adds the most value to a used vehicle. It is important that every vehicle should be carefully valued before offering it to the market. This would include cleaning and paintwork, shampooing the seats and carpet, steam cleaning and if necessary repainting the engine compartment.

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A new mat in the boot will also add to the vehicles appearance. If a vehicle appears well cared for, buyers will automatically tend to assume that the vehicle is mechanically sound. By contrast a vehicle that looks a mess encourages the buyer to look closely for other defects.

Try to view the vehicle as if you were the potential buyer. A buyer looks first, hardest and longest at the front end of the vehicle, then at the upper portion of both sides. He tends to look last at the lower portion of the sides and will barely glance at the rear end or roof, unless there is something clearly wrong with them. This visual approach also means that if a vehicle has only two good tyres, they should be mounted on the two front wheels.

Be very careful when considering the expense of mechanical reconditioning, because for the most part this is invisible to the buyer. For example, a vehicle with a new transmission is normally worth no more than the same vehicle with an original but properly operating transmission.

A vehicle is also more valuable if it is in a running condition. A non-runner invites speculation about expensive repairs. Avoid trying to sell this vehicle, especially if the problem can be cured at nominal cost.

Remember your vehicle is being sold to a consumer market, which is concerned about fuel consumption, mechanical condition and image. It is important that your reconditioning costs and methods take these matters into account.

Reconditioning can be a complicated and time-consuming process for the company. It does require expertise and constant attention to this particular process. But if it is properly managed, the process of reconditioning will help maximize the selling price of any one of your fleet vehicles. Remember in the final analysis it will decrease the cost of depreciation.

A THREE VEHICLE SCENARIO

Imagine a scenario where three almost identical vehicles are being sold on an auction. They are 2.0 engined sedans, about three years old, each with 115 000 kms on the clock. The first vehicle sells for a poor price of R6 000 below book, the second vehicle sells for only R1 000 below book and the third vehicle sells for R1 000 more than the first vehicle.

THE FIRST VEHICLE came directly from the driver without having been cleaned, inside or outside. The paintwork was grubby and there were a number of small dents. It was not in very good condition and

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was placed with other similar vehicles. It was sold at the end of auction when most of the buyers had already left.

THE SECOND VEHICLE had been well looked after. It had been properly cleaned and the fleet manager had sent in all the necessary papers and service history. The vehicle had been well maintained and some thought had been put into the disposal procedure.

THE THIRD VEHICLE had also been looked after, but was actually sold to a private trader, who left feeling that he got himself a bargain.

You might think that these are unusual examples, but this is typically what happens at actions. It never fails to amaze people in the disposal business just how many fleet managers sell their vehicles without very much thought. The real problem is that it costs fleet owners thousands of Rands every month. Depreciation is still a fleet’s highest operating cost, and a lack of planning at disposal time does very little to control these costs.

There are no short cuts to disposal, and when managers think about it right from the start, even from selection and replacement timing, there is a chance to make proper savings. In the end, you actually need savings. In the end, you actually need to have the vehicle on the market on the right time and at the right place. It pays to be flexible and not let old prejudices stand in the way.

Perhaps you have only been sending your vehicles to auctions as a last resort. Although many buyers are from the trade, auctions have attracted many more retail buyers. This has resulted in prices moving upwards in many instances.

A major change in services over recent years has been the helpful advice that is given to fleet owners by auctioneers. This includes setting market related residual values to the actual time of disposal.

Most vehicles coming on to the market these days are between three and four years old, with about 140 000 kms. Perhaps you should be thinking about “producing” some lower kilometre vehicles for disposal. They will probably get higher prices because these vehicles are going to be at a premium in a few years time.

ACCESSORY LEVELS ARE IMPORTANT

Most vehicles today come with standard equipment and accessories. However, there are options and these need to be looked at carefully. Some fleets allow their drivers to choose the biggest vehicle they can get for the money. This sometimes results in the driver bringing a difficult to sell, basic model into the fleet. It all might sound unimportant, but in the end, it is costing you a lot of money.

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A DISPOSAL CHECK LIST

1. Be flexible. Try different methods of disposal. About 50% of all companies still sell their vehicles to their employees.

2. If you are using one auctioneer on a regular basis, try negotiating a maximum commission level.

3. Be creative, especially at buying time. Think about things like trade-backs and guaranteed buy-backs.

4. Try to take a look at the future and decide what vehicles are likely to bring you the best prices in the future.

5. Schedule your replacement cycles carefully, and decide what the best age and kilometres will be for the particular vehicle.

6. Have a proper system for dealing with vehicles at disposal time. From deciding how much to spend on the vehicle, to settling the actual reserve price.

7. Build up a well cared for image, for your fleet of vehicles. Encourage your drivers with an incentive scheme to look after their vehicles.

8. Equip vehicles to minimize wear and tear. Items such as floor mats will always be a good investment.

9. Make sure that the vehicle’s papers and service history are available at sale time.

10.Do not throw away valuable items such as a full tank of petrol or a new spare tyre, unless you are doing it deliberately.

THE USED MARKET HAS NEVER BEEN AN EASY MARKET. SO IF YOU WANT TO KEEP YOUR DEPTRCIATION COSTS DOWN TO THE MINIMUM, GOOD PREPARATION AND PLANNING ARE ESSENTIAL AT DISPOSAL TIME.

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CHAPTER 10

VEHICLE ALLOWANCE SCHEMES

If ever there was a point of confusion in the fleet market, it is about vehicle allowance schemes, sometimes referred to as self-owned vehicles. People have so many different ideas about what is good and bad. Usually it depends whose point of view one is looking from, i.e. the employees or employers

The information covered in this chapter will help you to –

Get some background on these schemes. Explain what a vehicle allowance is and some issues

related to them. Set an allowance and explain the matters that a

company needs to consider. Calculate an actual allowance. Explain what perks tax is. Know some of the pertinent legislative facts

concerning perks tax. Work out the actual perks tax payable. Compare the difference in tax rates between a

company vehicle and a vehicle allowance.

A vehicle allowance scheme is used when the company gives an employee a fixed monthly allowance to cover the costs of purchasing a vehicle and using it for company purposes. The allowance usually covers the costs of finance, petrol, maintenance and repairs, licenses and insurance. These schemes and the actual amounts paid will vary considerable from company to company.

Perks Tax has to be paid by an employee on the value of the vehicle he has, either as a company vehicle or the one chosen, using the vehicle allowance.

Any company is concerned with cash flow, vehicle costs and personnel considerations. If there is an overriding need to get assets off balance sheet, meet a competitors fleet policy or resolve specific personnel needs then an allowance scheme is an option. However, it is not an opportunity to abdicate fleet management responsibility.

Let’s look at how one should develop a proper vehicle allowance. It takes into account many aspects that fleet managers and company executives tend to ignore.

VEHICLE ALLOWANCE SCHEMES

In general, your decisions must be based on the FLEET MANAGEMENT principles, rather than pressure from employees.

The number of companies using the vehicle allowance schemes has tended to remain fairly static. One of the main reasons that many companies have moved off allowance schemes is because of inherent problems of trying to control their drivers. The other trend has been for more companies to offer senior and middle management the option of a vehicle allowance as this fits into their policy of giving these mangers a total pay package. There are always an optimum number of kilometers that a driver must travel every month to optimize the benefits of a vehicle allowance scheme. This can be calculated from the tax schedules. Legislation changes on a regular basis, so this point needs to be watched constantly.

To actually decide between the two options, it is necessary to consider the following:

Total kilometers per annum; Total business kilometers per annum; Whether the vehicle will appreciate in value; Whether the vehicle will be kept at the end of the financial

period or traded in; Company policy;

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Running costs;

Then, one must compare the taxable amounts payable for the two options, using the published tax tables published by the tax authorities. All the regulations and tax tables in this chapter are based on South African legislation.

DETERMINING THE ALLOWANCE TO BE PAID

Any company is concerned with internal cash flows, ultimate vehicle costs and personnel considerations. However, this is not an opportunity to abdicate vehicle management responsibilities. In fact, it has been proven that properly run allowance schemes require as much, if not more control than a company vehicle scheme. The decisions relating to the actual allowance to be paid needs careful consideration in respect of:

Maintenance costs and control Interest rates Allocation of credit risk Use of fleet cards Petrol allowance Type of financial transaction Insurance VAT input credits

Let us review these issues and put them into perspective.

MAINTENANCE

If maintenance is paid by the employee, no VAT input can be claimed by the company. On an average cost of R400.00 per month, VAT is R50.00 or R600.00 per year. On 50 vehicles over four years, this equals R120 000.00. It is financially better for the company to pay for maintenance, claim the VAT inputs and reflect the costs on the employee's tax form. The easiest way to do this is to use maintenance plans for all allowance scheme vehicles or a fleet card for other with appropriate controls.

INTEREST RATES

If left on their own, employees would get charged higher rates of interest by the banks than the company interest rate. It is better to arrange matters with your bank for a corporate oriented rate. This will reduce the cost of the allowance that needs to be paid to the driver.

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FLEET CARDS

These cards should be used to pay for fuel. You will have the advantage of using the monthly reports to control fuel purchases and kilometers traveled. With fuel likely to remain at a high cost, it is important to manage these matters properly.

INSURANCE

The same comments made on maintenance are applicable to insurance payments. Apart from this, an employee is unable to claim any tax allowance on these payments. In a sense, he is “double taxed”. Insurance should be paid direct by the employer - not only to be able to claim the VAT, but to reduce the employee’s tax burdens. Consideration must be given to Credit Life and “Top Up” insurance.

CALCULATING A VEHICLE ALLOWANCE

An example is given below on the calculations needed to set an allowance. Assume the following facts:

Vehicle Price R200 000.00Fuel 12L / 100 kilometersR + M Costs (includes Tyres) R800.00 pmKilometers per month 2 500Interest Rate Prime 9%Fleet card R30.00Insurance R900.00Finance Method Installment sale with 30% RVPeriod 4 years

Note the inclusion of a reasonable RV, reduces the monthly payment and in turn, the costs for the company. The calculation result is:

Financing R3 933.91 per monthFuel R3 000.00 per monthR + M R800.00 per monthFleet card R30.00 per monthInsurance R900.00 per monthTOTAL ALLOWANCE R8 663.91

In general, most vehicle allowance schemes are poorly implemented. The cost burden and administration has generally increased for the fleet owner. However, if the proper vehicle management principles are taken into account, these schemes can be run properly and effectively

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This is your overall checklist to use when looking at allowance schemes.

ALLOWANCE SCHEMES1. Any company is concerned with :-

Cash Flow Vehicle Costs Personnel Problems

2. Moving to allowance? Then think about:- Total kms per annum Total business kms Depreciation Keeping vehicle at the end of the period Operating costs Look at the tax considerations

3. If there is overriding need:- To get asset OFF BALANCE SHEET Meet a competitors scheme Resolve specific personnel problems

4. How much allowance to give? Think about these important points:- Maintenance costs and controls Interest rates Credit risks Use of fleet cards Petrol allowance Financial transaction

VEHICLE ALLOWANCE VERSUS THE CORPORATE VEHICLE

The following comparative table will help you with a comparison of the two options. It shows you the options from an employee’s and the employer’s point of view. Things will change from time to time as new legislation is introduced.

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THE CORPORATE VEHICLE

ADVANTAGES DISADVANTAGES

EMPLOYEE

1. 1. Fully maintained vehicle without the problems associated with ownership.

1. May have to pay more tax based on business kilometres

2. Only cash outflow is fringe benefit tax payable on a monthly basis.

2. No asset being acquired.

3. Can upgrade to a better vehicle (if allowed by the company) by contributing to the cost by sacrificing a bonus or salary increment.

3. No ability to trade vehicle at a profit.

4. Vehicle replaced regularly in terms of the employer’s policy.

4. Vehicle selection often restricted.

5. Allowed to purchase the vehicle at replacement at a preferential price. This benefit is taxable.

5. Company replacement policy sometimes unusually long.

6. Responsible for maintaining a log book to justify usage.

6. Fuel is usually paid by the company.

7. Fixed PAYE calculation.

EMPLOYER

1. Lower cost as buying power will result in bigger discounts on vehicles and parts and lower finance charges.

1. Burden of administration and upkeep – petrol and maintenance.

2. Company vehicles operate to required standards.

2. Replacement of vehicles increasingly costly and requiring additional investment or borrowings.

3. Can use Maintenance Plans to reduce costs.

3. Accurate budgeting difficult.

4. Ability to self insure fleet 4. Certain employees tend not

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in order to reduce costs. to look after the vehicles as well as they may look after their own.

Good control on fuel and maintenance costs.

5. Have an asset to dispose of or reallocate when an employee leaves.

5. Good depreciation control.

6. VAT inputs claimable on maintenance costs and insurance.

THE VEHICLE ALLOWANCE

ADVANTAGES DISADVANTAGES

EMPLOYEE

1. May choose the vehicle he wants and can afford.

1. Assumes the full risk of vehicle ownership i.e. repairs, accidents and resale.

2. He acquires ownership and has the benefit of resale value (profit) without tax provided the original transaction was structured correctly.

2. May find difficulty in obtaining finance or has to pay high interest rates unless group scheme implemented.

3. Higher business kilometres reduce PAYE considerably.

3. Has to administer his allowance and keep accurate record of kilometres travelled and expenses.

4. Expenditure of allowance is under his control.

4. Employer may tend to “save” by paying an allowance which could be less than the actual cost of maintaining the vehicle.

5. Could have difficulty in disposing of vehicle when wishing to move from the company paying an allowance to one giving a company vehicle.

6. Must drive at least 2800 kms to equate company vehicle tax deduction.

7. Private use fixed at 18 000.kms pa

8. Cash flow reduced due to

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PAYE on 20% of allowance.

MPLOYER

1. No capital required to finance vehicles.

1. Lose control over quality of transport.

2. Vehicles can be financed off balance sheet.

2. Costs are not less than providing company vehicles.

3. The allowance may be fixed annually permitting more accurate budgeting. For example, an allowance for fixed costs with your company providing petrol and maintenance plan.

3. Many personnel problems emerge because poor cash management related to maintenance tax.

4. The administrative burden is reduced and the maintenance burden eliminated.

4. Can lose control over kilometres driven and fuel costs.

5. Company image can be adversely affected.

6. If optional, administration is actually increased.

7. Not easy to set acceptable allowances. They also need to be regularly reviewed.

8. Perks tax legislation will increase administration.

9. No VAT inputs claimable on maintenance and insurance if full allowance is paid direct to employee.

It needs a lot of careful planning and organization to implement a cost effective allowance scheme. Don’t let anyone tell you otherwise.

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CHAPTER 11

EXPENSE MANAGEMENT AND ADMINISTRATION

By now you should have achieved a very good understanding of the core principles of fleet management.

You will remember that there were three core areas of fleet management that you had to think about. They were, Fleet Policy; Administration; Cost control. Ultimately you need to have a good cost control system in place.

The information covered in this chapter will help you to –

Understand the main issues of Cost Control Give you some ideas of the Role of the Fleet Manager. Learn about some of the administrative issues that are

important when managing a fleet of vehicles.

Let’s look at some of the main issues relating to controlling fleet costs.

CONTROLLING RUNNING COSTS

With fleet operating costs constantly increasing it should come as no surprise that a fleet of 100 vehicles cost in excess of R12 million a year to own and operate. In three years time this cost will have increased to R16 million. It is essential to apply effective management and expense control techniques in controlling running costs.

The work required to control and operate a fleet of vehicles effectively, usually involves the time of your marketing, financing, buying and administrative departments. Not only is this costly, but because the functions are split among a number of departments, effective control of the vehicles can be difficult to establish.

One can continue an internal administration system, often stretching resources to keep up with ever increasing demands. However, it might be far easier, less frustrating and more economical to enjoy the benefits of a computerised expense control system as offered by some of the major banks and FleetCUBE Online.

One of the biggest problems in controlling costs is getting accurate information into the system. The driver’s logbook was the traditional method, but it always presented problems. More often than not, the logbook was completed at the end of the month. Drivers disliked completing it unless there was an incentive for them to do it properly. Furthermore, if the driver uses the normal type of petrol card to pay for his purchases, the logbook is just duplicated paperwork.

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FLEET CARDS – THE BEST WAY

A fleet card is used in the same way as any normal credit card, the only difference being that it can be designated for specific use, i.e. petrol only. When the voucher is completed and imprinted with the fleet card, the driver’s paperwork responsibilities end and accurate data is allocated to the correct vehicle for the expense control system.

The garage or dealer deposits the vouchers at his nearest bank and within a few days a copy of the voucher reaches the fleet card company and is used as input data for your fleet’s expense control reports. These monthly reports are an invaluable resource for costs in terms of Rands and costs/ kilometre.

MANAGEMENT OBJECTIVES

A major fleet management objective should be to reduce your fixed and variable costs. To achieve this, it is essential that you allocate costs into meaningful categories. Your fleet management information system (FMIS) will help you do this. You then have the information to:

Compare your fleet costs with other companies in your industry; Compare one vehicle against another in terms of overall

operating efficiency, prior to reordering; Ensure strict compliance with a maintenance plan; Plan your replacement schedules properly; Improve resale values because your vehicles are mechanically

sound.

A FMIS report for vehicles and trucks should be designed to help you accomplish these objectives without using your own resources to design and operate your own control system. The whole subject of deciding on EXTERNAL or INTERNAL administration and cost management is covered in the chapter on outsourcing.

DECISION MAKING

One important reason for companies having a proper FMIS control system is to ensure that the controls exercised over transport operations are sound and cost effective. Without the availability of meaningful and properly quantified expense control, it is almost impossible to make sound fleet management decisions and control running costs. Policy can only be properly evaluated for its cost effectiveness if appropriate costs are available.

YOU NEED COSTS IN COST PER KILOMETRE

It is also essential for all costs to be reported in both Rands and costs per kilometre. Rands, from a budget aspect, and costs/ kilometre

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related to operating cost efficient. All the areas of the fleet need rules and regulations. The effectiveness of these decisions is usually judged in terms of actual costs/ kilometre costs. These costs can also be reviewed monthly, quarterly, year-to-date, as actual and as trends.

Each of the areas of fleet management would need a detailed review to take all factors into account. However, some of the major considerations related to overall operating costs are given below. If necessary, refer back to the previous chapters to make sure you understand these issues.

VEHICLEE AND MAINTENANCE

What simple controls can be used to ensure correct care and maintenance for vehicles and trucks? How can these be related to trade-in values? Could maintenance plans be used to control costs? How do current costs and annual increases compare to the costs of outside supplier?

VEHICLE SELECTION:

What types, models and equipment should be authorized? Have depreciation costs been considered? Is the vehicle suited for its intended use? Be careful about buying down. Are the current costs/ kilometre costs of vehicles inline with your original projections?

REPLACEMENT:

Should replacement policy for vehicles be based on time in service or kilometres run? What arguments support a variable replacement program? What system can be used to assure timely replacement? What resale values are being achieved?

OPERATING COSTS

What are the full costs of operating the fleet? Projected forward, how will these affect company profitability? How can fleet management reports best be used to ensure reasonable cost levels and considerable savings? What trends are being recorded? Are they analysed properly?

ELIGIBILITY

Who should receive a company vehicle? What is the break-even point between providing a company vehicle and reimbursement to staff for business of their private vehicle? How are vehicles selected for staff at various levels? Are they in line with your industry norms?

PERSONAL USE

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Should drivers be allowed personal use of company vehicles? How much should be charged and what cost data is available to support the charge?

INSURANCE

What opportunities are available to reduce insurance costs? Is the “self insurance” method practical in relation to the size of your fleet and past accident history? Do you have an effective accident control programme?

ADMINISTRATION

How can the welter of detail involved in fleet administration be simplified and reduced? What forms can be supplied or designed to meet administrative requirements? Who should administer the company fleet? How many people are normally required for this task?

LEASING VS OWNERSHIP

Should a fleet be owned or financed? What are the costs associated with each form of financing? If the vehicles are leased, what type of leasing should be used? Are residual values being used?

The fundamental objective of any expense control system and a professional fleet management service should be to assist you in developing policies, procedures and controls. It must provide the right answers to these questions and ultimately give you the best possible financial control over your fleet.

You will remember the fleet internal audit questionnaire given to you in chapter two. This gives you the detailed questions needed to assess your fleet operations. Take time now to go back to chapter two and review it in conjunction with the above cost management issues.

You will realize that fleet management is not to do with only one area, e.g., vehicle selection. Every aspect has to be considered as part of the whole issue of fleet management. Once you understand this, you will have made a major step in applying proper concepts and techniques to managing a fleet.

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CHAPTER 12

CONTROLLING RUNNING COSTS

Vehicle management covers many important aspects from a business management point of view. There maybe six core areas but at the same time many other business issues interface in these vehicle management matters. This chapter covers some of the other vehicle management matters that are also important in a business. It is not unusual to find that after Human Resources and payroll costs that the next biggest cost element in a company is the cost of the company’s vehicles.

It is worthwhile remembering that any savings in vehicle costs goes directly to the bottom line in terms of the company’s financial results.

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The information covered in this chapter will help you to –

Understand some of the key problems faced by vehicle managers.Do an analysis on your companies and your own vehicle management level of expertise.Review the need to downsize the vehicles in your company.

THE BIGGEST CHALLENGES TO VEHICLE MANAGEMENT!

THEY COME AND GO YEAR BY YEAR, BUT MOST OF THEM HAVE A HABIT OF HARASSING YOU ON A DAILY BASIS.

These problems are likely to fall into the following areas:

1. Controlling Operating Costs2. Vehicle Selection3. Selling Used Vehicles4. The Problems Of Financing Acquisitions5. Vehicle Allowance/ Self Owned Schemes6. A Fleet Managers Productivity

Remember problems can be turned into opportunities. Don’t accept problems – do something about them and learn to really control your vehicle operating costs.

PROBLEM NO 1:How do you really control Operating Costs?

Controlling a fleet’s operating costs is a real problem to many clear thinking fleet owners. They want to know the full details right down to the costs/ kilometre figures. At the other end of the scale, there are some major fleets that take the attitude that in proportion to overall company turn over, the fleet costs are a very small percentage and detail costings not an important issue.

The big question to ask is – ‘do we have a proper FMIS to assit in controlling fleet operations?’ You might say YES!, but then you need to check whether it is an operating cost system that only records and controls fuel purchases and repair and maintenance costs. Some fleet owners believe this is adequate. Yet there has to be operating cost reporting in the required costs/ kilometre figures for items such as depreciation, interest, insurance and other fixed costs.

These fixed costs are usually a fleet’s biggest costs. They usually represent about 60% of total operating costs. So using a fleet management cost control system that does not record and analyse these costs will not give the right control on operating costs.

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Proper expense control needs a system that records the whole cross section of vehicle operating costs. It must also be presented in a report format that presents the information clearly and makes it easy to use.

The reporting system aside – cost control actually starts with proper vehicle selection, controlled repair, maintenance services, proper replacement timing and finally achieving optimum resale values.

Controlling maintenance can be out sourced, but when done internally here are a few ideas that can help control costs.

Develop a maintenance manual specifically for your fleets needs. Don’t be hide bound to manufacturer specifications or timing, as these are set to general operating conditions, and also on the concept that prevention is better than cure.

Set up a toll free authorisation number for drivers. Set clear guidelines on authority limits. Define policies clearly for Fleet vehicle usage. Explain warranty procedures. Define when to go to franchised dealers, and when to go to other

facilities such as tyre dealer, exhaust/shock absorber outlets, accessory repairs, etc.

Tyre replacement policies and maintenance. How to handle emergency repairs. Especially set out accident procedures. Also how to deal with the

“towing brigade”. Payment methods – fleet cards or otherwise.

You must get the driver’s co-operation as well as line management. This is one of the key ingredients to making this type of programme work. You need support for your policies.

Finally, remember that a good maintenance plan keeps things under proper control. Driver convenience should not be the key issue – it is controlling costs that are the main objective.

PROBLEM NO 2:How do you select vehicles properly?

This is a critical function in a fleet operation because it can have a major impact on eventual operating costs. Too many fleet owners just think that price is the main issue. It is more than that, because selection also affects life cycle costs, company image, driver morale and the needs of your business.

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This all adds up to operating costs in the long run: -

When you select a new vehicle, you have immediately moved into the used market in 3 to 4 years time. Your selection will have an impact on the resale value you eventually obtain.

Poor selection can affect the drivers’ attitudes towards the vehicle. They will both support your choice and look after their vehicles, or they will tend to hammer the vehicle which will cost you money in the long run.

Think of the possible impact on insurance premiums. Consider potential total operating costs and finally decide on

either:- The bench mark concept where any vehicle in the market can be

chosen or, The specific vehicle selection based on actual costs/ kilometre

operating costs

PROBLEM NO 3Selling used vehicles to get the best prices.

Selling used vehicles properly requires, in the first instance, that you have developed a proper replacement policy. It is surprising how many companies have policies that actually do not fit into the various vehicle operating situations. For example, you should not have the same policy for essential users that average 3 500 kms a month as for company executives who only average 2 500 kms a month.

Analyse the specific situation in your fleet, especially in the three major vehicle groups’ i.e. essential users, middle management and senior management – then look at your Light commercial vehicles.

You can maximise residual values in many ways:-

Offer vehicles to your drivers and other employees at market related prices.

Get vehicles to the right market at the right time and place. Be prepared to ship vehicles to other cities if need be – e.g. to

the coast where rust is a problem. Keep a documented history of the maintenance. Be prepared to spend money on elementary make good costs –

especially a valet service. Don’t simply get “three quotes” from dealers. There are more

effective methods to achieve optimum prices with the minimum administrative work – such as selling through fleet market auctioneers.

PROBLEM NO 4Choosing the best finance method is a constant problem.

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There are few questions that raise as much discussion as whether to finance vehicle purchases or to pay cash. The decision should be based on clear and correct financial analysis using discounted cash flow programmes. The company financial executive should be fully conversant with this technique so that the correct decisions can be properly formulated.

If someone says – “leasing is too expensive – look at all the interest you have to pay!” one must simply accept that they have not taken the time to understand the concepts of discounted cash flows properly. Financing is not a case of gut feel; it needs attention and application to the proper financial techniques.

The average asset value of 50 vehicles is probably nearer to R9 million (2011). It is a lot of money to tie up in cash, especially if the cash could be invested in the company’s normal business to create a positive return on assets. Apart from this, one should also review certain specific matters:-

Is a financial comparison necessary? Has there been a change in the companies’ financial situation? For example, the company needs to get the vehicles off the balance sheet.

Is it a periodic review? Don’t make financing decisions at the beginning of the financial year only. A quarterly review makes more sense.

What kind of financial programme should be used – straight leases – with residual values or balloon payments – rentals - FML? Watch the banks – they have their own agendas. Be careful and compare monthly payments and not just interest rates.

What implications are there in respect of overall operations? If FML is to be used for example, how will this impact on costs and operations? What services will the FML company provide?

Being able to interpret the results of any financial analysis is important for your fleet operations.

PROBLEM NO 5:Vehicle allowances schemes or Self Owned vehicles? YES OR NO!

Vehicles on allowance schemes have reached a certain number – about 25% of the fleet park. However, over the last few years there has been hardly any increase in the use of these schemes. Individuals have become more aware of the problems – like being taxed up front on 80% of the monthly allowance and the high tax payments due when insufficient kilometres are driven in any one year.

In a normal allowance scenario, a vehicle must be driven at least 3 000 kms a month for the scheme to be cost effective from a tax point of view. This is on the basis of comparing a similar company vehicle, on

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which the individual is taxed at 3.5% on the value of the vehicle including VAT.

The overall problem is the need to make proper fleet management decisions in respect of the two basic options - company vehicles or allowance schemes.

Companies don’t like giving even a R200 entertainment allowances because they are “abused”, yet they are prepared to give drivers of all ages and levels in the company, a vehicle allowance that can range from R6 000 a month to R9 000 a month.

The decision is often motivated by the so called problems of managing the fleet. This type of abdication usually results in higher overall costs and many more personnel and management problems. Perhaps the problems disappear from the head office but usually they increase at the division or branch level.

No properly run company can ignore the management of its fleet of say 100 vehicles. Annual costs for this sized fleet will be about R11 million with a need to control assets with a value of about R18 million. There is no way that one gets effective control by passing this down to 100 drivers – each with their own concerns foremost in their minds.

How much allowance to pay is seldom a problem. The real problem lies in managing the fleet effectively. Allowance schemes are not the panacea to your fleet operations.

PROBLEM NO 6:Being productive as a fleet manager creates its own problems.

Not every company has a proper fleet manager. More often than not this duty is delegated to one of the company executives or administrative managers.

When a company does have a fleet manager, sometimes one finds that, against all good management principles, the person also gets given a number of other incongruous responsibilities. To name a few: workshop manager; canteen responsibility; gardens and maintenance; fire control officer; security. It’s no wonder that one sees few real fleet managers who have the full responsibility for all fleet operations.

However, if you have this area of the company under your control, there are a number of key operational aspects that require your attention, if this job is to be done effectively.

Know all there is to know about total vehicle management. Be a professional in every sense. Be the total manager in managing your fleet.

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Ensure you develop a proper service to both your internal and external customers.

Develop yourself as a proper manager in order to earn respect and credibility from your associates and superiors.

Anticipate the company’s vehicle needs and try to be proactive. Keep up to date with all aspects related to the motor industry

and the potential effects on your vehicle operations. Be flexible in achieving your goals and objectives. Work properly with the other divisions in your company e.g.

Production, Sales, Personnel, Finance.

More than anything else, develop a sound, regular reporting system for top management on the successes and achievements of the fleet department. Management needs to know your contribution to the bottom line.

Remember that fuel costs are about 30%, depreciation about 33%, interest charges about 16% of your total costs. Report on each cost area in respect of current costs and trends. Also take each aspect of fleet management and report on current procedures and their effectiveness in relation to operating costs. For example:-

Selection procedures and acquisition costs. Disposal method and resale values achieved compared to market

averages. Use of maintenance plans and cost control.

Be professional; earn the respect of the company. Most of all be a full time fleet manager.

PROBLEMS CAN BECOME OPPORTUNITIESWHEN YOU USE THE CORRECT FLEET

MANAGEMENT PRINCIPLES

YOUR FLEET MANAGEMENT INFORMATION SYSTEM EFFECTIVENES ANALYSIS

This GAP analysis graph can be used to decide how effective your internal vehicle management systems are working for you. You should take each of the core areas of vehicle management and do a separate analysis. The left side 0% to 100% is your evaluation of the efficiency or effectiveness of the policy being evaluated. The bottom 0% to 100% is your evaluation of the internal IT or manual systems being used to provide the necessary management tools or reports.

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For example, assume that your purchasing policies are assessed as being at the 60% level on the left side of the graph but the internal system is only rated as being 35% efficient. You point on the GAP analysis would be at the lower end of the TOP LEFT block. In other words you ideally should implement a new purchasing system within your company.

100%

Cost effectiveness

New fleet purchasing system required to increase cost efficiency levels

Develop new/ existing fleet management system

levels in terms of costs/ kilometres

0 %

Stop using current system – develop new fleet management system

Reassess effectiveness of your present fleet management system

0 % internal/ fleet

Management system 100 %

Before one can even hope to make quality decisions on fleet operations, it is essential to analyse your operations using this method. Use the following checklist as your guide to do this. No doubt these questions will trigger 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 use the main headings given below to do this analysis.

1. ACQUISITIONSelectionPurchasingFinance

2. OPERATIONS MANAGEMENTMaintenanceFuel TyresCost managementDriver managementAccident managementComparative operating cost dataUtilisation

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3. REMARKETINGReplacement modellingResale valuesDepreciation management

OVERALL BUSINESS – “THE BEST FIT ANALYSIS”.

This is another form of analysis that can be used. What you have to do to evaluate these matters is to grade each vehicle management matter shown below on the scale of 1 to 5. The first one relates to the general ‘turbulence’ in respect of vehicle operations in your fleet. The level here is more than likely to at ‘four’ level.

In theory, the other scales should be ahead in terms of this grade level. It is more often the case that these grades are behind the ‘turbulence’ level. This means that vehicle management is not keeping up with the driver’s and the company’s needs. This obviously means that specific change is needed to improve the situation.

1. YOUR CORPORATE FLEET MANAGEMENT ENVIRONMENT TURBULANCE

THE LEVEL OF ‘VEHICLE TURBULANCE’ IN THE COMPANY

1-----------------2-------------------3----------------4-----------------5

YOUR INTERNAL VEHICLE MANAGEMENT SYSTEMS 1-----------------2--------------------3---------------4-----------------5

YOUR COST EFFECTIVENESS

1-----------------2--------------------3---------------4-----------------5

2. STRATEGIC ORIENTATION TO YOUR CORPORATE GOALS

POLICY AND REGULATIONS

1-----------------2--------------------3---------------4-----------------5

ADMINISTRATIVE SYSTEMS AND PROCEDURES

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1-----------------2--------------------3---------------4-----------------5

OPERATING COST EFFECTIVENESS 1-----------------2--------------------3---------------4-----------------5

DRIVER MANAGEMENT

1-----------------2--------------------3---------------4-----------------5

3. YOUR CURRENT CAPABILTY TO MAKE CHANGES

POLICY AND REGULATIONS

1-----------------2--------------------3---------------4-----------------5

ADMINISTRATIVE SYSTEMS AND PROCEDURES

1-----------------2--------------------3---------------4-----------------5

OPERATING COST EFFECTIVENESS 1-----------------2--------------------3---------------4-----------------5

DRIVER MANAGEMENT

1-----------------2--------------------3---------------4-----------------5

As a small exercise – how about taking a few minutes to mark off the graphs as you think would fit your company.

THE ‘S’ CURVE

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This is another form of analysis that you can use for forward fleet operations planning. The curve represents a cost efficiency curve in terms of costs per kilometre.

POINT 1.

The cost efficiency curve of the fleet can start to fall away due to a number of internal or external economic factors i.e. the last international recession

POINT 2.

The cost efficiency curve of the fleet can only be improved if specific action is taken in the company in terms of managing the fleet. If not done, this curve will continue on a downward trend i.e. costs will continue to escalate.

POINT 3.

The cost efficiency curve of the fleet can only improve if the new fleet management processes are continuously applied and managed using the latest fleet management techniques

FURTHER OPPORTUNITIES TO REDUCE FLEET COSTS

Today’s business environment requires companies to constantly monitor and review all aspects of fleet operations to ensure everything the organisation does adds value and is being done in the most cost effective manner.

Company vehicle fleets represent a major investment for field sales and service-oriented companies. Companies should review their fleet operations with the same focus on cost effectiveness that applies to similar activities throughout the organisation.

These guidelines provide an overview of the significant issues, which impact the cost of operating a fleet. The focus is on major decisions executive fleet managers must make and their impact on the bottom line. There are always ways to reduce fleet operating costs. The

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company must decide whether or not it’s willing to alter its approach in return for those cost savings.

WHY PROVIDE COMPANY VEHICLES?

The most obvious point to address is why the company is providing vehicles to employees. When a company’s employees need to travel as part of their job responsibilities, a company has two conceptual options. They can rely on the employee to use a personal vehicle and reimburse the employee for business use or they can provide a vehicle for the employee to use.

Company vehicles are provided for a number of reasons:

Most cost effective alternative when business use is high Employee hiring and retention Maintaining an appropriate image in the marketplace Necessary for special vehicle application A form of compensation

COST EFFECTIVENESS

When employees are classed as ESSENTIAL USERS, it is less expensive to provide company vehicles than to reimburse them for the use of their own vehicle at wholesale costs, while an individual operates a vehicle at retail costs. The vehicle’s purchase price, maintenance costs, fuels costs, and financing costs are substantially lower because of the company’s buying power compared to what any individual would be able to achieve on one vehicle.

In order for that buying power to be meaningful to the company, however, the vehicle’s use must be primarily business related. Otherwise, the company is simply incurring lower costs to pass on a benefit to the employee. Analyses show that the break-even point to the company is about 15 000 business kilometres per year.

If a vehicle is not used to drive at least 15 000 business kilometres, it is less expensive for the company to reimburse the employee for the use of a personal vehicle. At more than 15 000 annual business kilometres, it is less expensive to operate a company vehicle.

EMPLOYEE HIRING AND RETENTION

Within many industries it may be standard practice to provide company vehicles to sales or service personnel. Company vehicles are often used to attract and keep good employees. Still, as companies

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review the use of company vehicles, they should identify how important this factor is in the overall plan.

While the provision of a company vehicle may continue to be a necessary aspect of what is essentially a Human Resources issue, there may be latitude in the type of vehicle provided as this can impact on costs.

MAINTAINING AN APPROPRIATE IMAGE IN THE MARKETPLACE

Company image is very important in today’s business environment. Everything about the image salesperson’s project, from the way they dress to the vehicle they drive, is managed by the organisation. Projecting an appropriate and consistent image is a key reason for providing vehicles to salespeople, rather than reimbursing them for the use of their own vehicles, i.e. vehicle allowance schemes.

Companies need to review the nature of the customer contact their sales force has, to determine the importance of projecting an image through the vehicle the salesperson drives. Service differentiation factors are becoming key issues in today’s competitive market.

NECESSARY FOR SPECIAL VEHICLE APPLICATION

A key reason many companies provide vehicles is that a special purpose vehicle is required and the company cannot expect the employee to have a vehicle that’s appropriate for that use. Examples include vehicles that carry significant cargo or samples, or equipment that would require a mini-van, for instance.

A FORM OF COMPENSATION

While the vast majority of fleet vehicles used today are used predominantly for business, there are many situations where the vehicle is primarily a perquisite part of the package. Vehicles are a form of compensation most employees highly value. If given the choice of additional cash compensation or a company vehicle, most choose the company vehicle because it is a more recognisable form of compensation.

When vehicles are provided as a form of compensation, they should be viewed in the context of the overall compensation and benefits package, more so than from a fleet operations perspective.

WHAT TYPE OF VEHICLE IS APPROPRIATE?

Virtually any fleet can reduce operating costs simply by using less expensive vehicles. Usually, this means using smaller vehicles, but it

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can also mean fewer options or lower package level (the base model, for example).

The decisions regarding vehicle type are closely related to the above considerations regarding the provision of company vehicles. Still there is latitude with specific vehicle choice that can impact overall fleet costs.

VEHICLE SIZE

A medium sized sedan is the most popular company vehicle for essential users. Some fleets still use larger vehicles but this category of vehicle typically costs about 20% more to operate.

Concerns regarding image, driver safety, and employee hiring/retention have traditionally been why companies haven’t moved to this class of vehicle.

The following chart shows the projected monthly cost of operating three different sized vehicles over a typical life cycle.

OPTIONAL EQUIPMENT

Over the years, fleet vehicles have been equipped with a higher level of accessories. This is due primarily to the increased expectations of used vehicle purchasers and the need to equip a vehicle appropriately to maximise resale value.

Vehicle safety is an important concern when equipping vehicles. Safety options, which are usually expensive, are often viewed as necessary because of their potential to protect employees.

Still, a close watch over accessories is warranted since higher initial vehicle cost usually means higher vehicle operating cost.

WHAT IS THE BEST REPLACEMENT CYCLE FOR FLEET VEHICLES?

Replacement cycling is an issue fleets periodically address. The goal is to determine the most cost-effective time to replace a vehicle. The general consensus has been to replace vehicles when they reach 120 000 kms – 140 000 kms (which usually occurs between three and four years into the vehicle’s service life).

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The economics of operating a vehicle are such that out-of-pocket average monthly operating costs continue to decline until the vehicle approaches 100 000 kilometres. However, vehicles become less reliable (and less presentable) beyond the 140 000 kilometre range and the real, but indirect, cost of driver downtime due to vehicle breakdowns and repairs makes it cost effective for most companies to replace at about 120 000 kilometres.

The cost limit approach is the best method to use.

SINGLE SOURCING WITH VEHICLE MANUFACTURER

Traditionally, fleets have used vehicles from all the manufacturers. If a fleet chooses to order all vehicles from one manufacturer, volume pricing may be available which will lower overall acquisition costs. What the fleet surrenders is the variety of vehicles offered to drivers. Furthermore, there is a slightly increased risk in working with just one manufacturer should that manufacturer have delivery or service problems. Still, the savings on acquisition cost can be substantial.

SINGLE SOURCING WITH FLEET MANAGEMENT PROVIDERS

There is usually little price savings from consolidating to a single fleet management service provider (e.g. FML company, maintenance provider, etc.) since those companies tend to price on total fleet size, regardless of their specific share. Yet from the standpoint of internal administration costs, it is clearly less expensive to work with one provider than multiple.

Each fleet management provider has different systems, forms, invoices and so on. The more providers a company works with, the greater the administration cost. By consolidating activity with one fleet management provider, a company can achieve substantial improvements in internal administration.

WHAT FLEET ACTIVITIES CAN YOU OUTSOURCE?

Outsourcing is a common practice for many business processes. Fleets have outsourced special services such as maintenance management and expense reporting, for years.

Because many fleet management activities require specialised knowledge or systems, it is often less expensive for fleets to outsource and pay as they use, rather than to build elaborate internal systems to accommodate those needs.

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Today, fleet managers can use outside providers to perform many aspects of fleet administration.

Outsourcing, in conjunction with the selection of a single supplier, allows for fleets to establish strong partnerships with fleet management providers that ultimately allow for increased service levels at an overall lower cost.

HOW CAN YOU BENCHMARK YOUR FLEET?

There is a great deal of information about average fleet operating costs and typical policies and procedures. Unfortunately, the basis for that information is generally so broad and diverse; it has little specific meaning to a particular type of fleet such as a pharmaceutical fleet.

Fleet management providers usually work with multiple fleets of the same type and are in good position to help fleets benchmark against similar operations. They can also facilitate the sharing of information on fleet issues that are of mutual concern.

Benchmarking not only helps fleets gauge where their operations are, but helps identify what is necessary to move in a given direction. Fleet management and FML companies are in a particularly good position to assist in benchmarking because they are exposed to all aspects of a fleet’s operation. A fleet management provider should be able to facilitate benchmarking (costs and policies) with similar fleets so all benefit from shared experiences.

IN REVIEW

In addition to these issues there are other opportunities to reduce costs through fleet policy management such as personal use charges, vehicle sales to employees, and safety programmes, to name a few.

It is important that company’s review their fleet operations to ensure that goals are clearly identified and those goals are reached in the most cost-effective way. There are always opportunities to reduce fleet costs, but only when the fleets’ objectives are clear, can they be reduced without compromising the fleet’s primary role.

THE ROLE OF THE FLEET MANAGER

A successful fleet manager should be concerned about the following areas of fleet management. In fact, these areas should be covered in the fleet managers KPIs

GOALS AND OBJECTIVES OF THE FLEET MANAGER

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FLEET ACTIVITY

Accident data: number, type and cost Replacement scheduling Operating cost control Vehicle selection Personal use Sales to employees Vehicle usage/kms Resale values Emergency vehicle needs Utilization

DRIVER MANAGEMENT AND CONTROL

Vehicle ordering Vehicle delivery Licensing and registration Additional services e.g., maintenance management, automated

renewals, etc. Vehicle sales to employees Vehicle returns Driver programmes Perks tax Vehicle allowances

KEY ACTIVITIES OF A FLEET DEPARTMENT

SET FLEET POLICES

General use of company vehicles Vehicle replacement Personal use Vehicle selection Sales to employees Safety programmes

VEHICLE PURCHASING

Routine factory/dealer orders Non-routine orders (hijack, theft, write-offs) Emergency needs

DELIVERY OF VEHICLES

Ÿ Dealer networkŸ Dealer flexibilityŸ Initial license and registration

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MANAGE VEHICLES IN THE FLEET

License management Maintenance management Accident management Operating cost control Safety management Fuel management Expense reimbursement Replacement decisions Fleet Card control

USED VEHICLE MARKETING

Sales to employees Sale network Net return on sales Depreciation management

INFORMATION MANAGEMENT

Cost allocations General accounting Computer systems Special needs reporting Ad hoc analysis of costs/trends Expense management Budget information process

WHAT IS A FLEET MANAGER?

We have garnered the collective thinking of a number of people on this particular matter. Use it to compare your own attitude as an executive in your company towards your fleet manager.

The function of fleet management varies from organization to organization. It can also be found at a number of different levels. The fleet manager may simply be a purchasing clerk or he may be a senior general manager with a staff of ten to twenty people under him.

The type, as well as the scope of responsibility may also vary. Fleet personnel may just be administrative personnel recording fleet operating costs and submitting monthly reports. The top fleet manager however, may be responsible for selecting new vehicles based on company needs, purchasing vehicles, selling used vehicles, controlling maintenance, maintaining cost control systems.

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He would probably be involved in the fleet insurance and accident management programme and do whatever is necessary to keep the fleet operational. These are major differences and all affect the final operating cost structure of a fleet.

Business skills should also be an inherent capability in anyone with fleet management responsibility. The accompanying skills and areas of expertise could include purchasing, accounting and budgeting, financial analysis, data processing, statistics, negotiating, personnel management, law, insurance and legislation.

While this list covers many of the possible directions and considerations of the fleet manager, they are not of equal value in different organizations. The criteria used to make the decisions and the skills emphasized, are often dependent on the fleet manager’s education and job history. Surprisingly, and perhaps more importantly, the department in which his or her unit is located also has an effect on how the fleet is managed.

It should be added, that often the person given responsibility for a fleet, may also have responsibilities in such areas as sales management or administration. Depending on what the fleet manager recognizes as “core” business, will have a significant impact on how cost effective the fleet operations are.

LOCATION OF THE FLEET MANAGER

Another matter that is worthwhile considering for those of you who are responsible for fleets or who direct the activities of fleet managers, is that of the actual location of the fleet department.

Many fleet managers indicate that the location of the fleet department within the organization, in part, dictates the function of, and the company’s orientation to the fleet department.

For example, a fleet manager in the Purchasing Department might be only concerned about the buying and disposing of vehicles at the lowest purchase prices and the highest resale values. On the other hand, a fleet manager in the Human Resources area might only really be concerned with vehicles as motivators and an integral part of the remuneration system. This person will not see the vehicle in its main role as an effective business tool.

In any fleet of reasonable size, an “Executive Fleet Management Committee” should be formed. All these managers should be members – HR, Finance, Operations, Fleet. This will ensure that all aspects of the business are taken into account.

CAREER PATHS

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The properly trained fleet manager is not an easy person to find. Few training facilities are available to anyone in the position of fleet manager, especially in day to day operational issues related to the average company fleet. However, the intensive 5 day fleet management course and 2 day advanced courses provided by FleetCUBE train people in the practical matters related to managing a fleet of vehicles.

The range of career paths open to fleet personnel is a critical factor in attracting skilled and dedicated fleet managers. Today's fleet manger has to be different from his counterpart of fifteen years ago in terms of skill requirement and job status.

Considering the fact that every 100 vehicles in a fleet will cost a total of R11 million a year in overall operating costs, is not surprising that top management has to become more aware of the importance of a well run fleet. Skilled fleet managers are needed to fill this function.

Consequently, a job in the fleet department should become an increasingly better option for people with management aspirations.

However, company executives should be aware that the decision for a qualified person to join the fleet department would be significantly influenced by their perception of future job options. Another major factor will be their understanding and view of the current responsibilities and challenges of the fleet position.

KEEPING FLEET MANAGEMENT IN PERSPECTIVE

The fleet manager is an important cog in the business process. Fleet costs will be largely dependent on this individual, even in decentralized fleets. The message is “Apply all due processes of management selection and training to the person in this position. The fleet manager has to be the right person for this important management position. He will be the right person if properly trained in all aspects of fleet management.

This is your opportunity to find an exciting career in fleet management, either in a company or in the fleet industry.

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CHAPTER 13

FLEET MANAGEMENT COMPANY BENCHMARKING

Internationally, the trend of fleet owners is to concentrate on their core business whilst outsourcing their fleet operations to a fleet management company. It is something that will happen more and more as we realise that the company vehicle is a depreciating asset which costs a lot of money over a twelve month period.

The usual fleet operation can be split into three basic areas:

Policy decisions Administration/implementation Cost management

Essentially it is the work related to fleet administration that is usually outsourced. At the same time the fleet management company should be in a position to provide guidance on all policy matters and cost trends.

To assist you in making a decision to outsource we have put together some guidelines on these matters. The information or checklists are divided up into the following areas:

1. Policy Decisions - Goals and Objectives of a fleet owner.2. Key activities of your fleet department.3. Expected services needed from fleet management company.

Each one lists a number of subjects that are related to the matter of checking on your current operations, checking on the proposed or actual services being provided by the fleet management company.

The ultimate objective must be to obtain cost-effective fleet management and administration from the outsourced company.

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1. Policy areas that relate to the Goals and Objectives of a fleet owner

THE MAIN POLICY AREAS FOR THE FLEET

CURRENT POLICYYes No

FLEET ACTIVITY

Replacement scheduling Operating cost control Vehicle selection Personal Use Sales to employees Vehicle usage Resale values Emergency vehicle needs Utilisation Vehicle ordering Vehicle delivery

DRIVER MANAGEMENT AND CONTROL

Licensing and registration Additional services (e.g.

maintenance Management, automated

renewals Vehicle sales to employees Vehicles returns Driver programmes Fines management Perks tax Vehicle allowances Accidents, date, number, type

and cost Allowance schemes

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2. Check and confirm that these key activities of your fleet department are effective

ARE EFFECTIVEYes No

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SET FLEET POLICIES General use of company vehicles Vehicle replacement Personal use Vehicle selection Sales to employees Safety programmesVEHICLE PURCHASING Routine factory/dealer orders Non-routine orders (hijack, theft, write-offs) Emergency needs Ordering proceduresDELIVERY VEHICLES Dealer network Dealer flexibility Initial licence and registrationMANAGE VEHICLES IN THE FLEET License management Maintenance management Accident management Operating cost control Safety management Fuel management Expense reimbursement Replacement decisions Fleet Vehicle controlUSED MARKETING Sales to employees Sale network Selling method Net return on sales Depreciation management INFORMATION MANAGEMENT Cost allocations General accounting Computer systems Special needs reporting Ad hoc analysis of costs/trends Expense management Budget information process Fleet management information system

The objective of doing these two exercises is to ensure that your current fleet operations are under reasonable control. It is also important to have a good idea of your current operating costs. It will be difficult to assess an outsourced supplier services and costs if you do not have the above information available.

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3. These are the services you should expect from a Fleet Management Company.

Fleet policiesSERVICE PROVIDEDYes No

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Trends in the industry Comparison of fleet performance Understand fleets goals and objectives Visits to client’s officePROVIDE OPERATING INFORMATION Impact of tax changes and legislation New model information and pricing General industry news Fleet costs Operating issues (e.g. production delays, Run outs, new vehicles)PROVIDE DAILY OPERATIONAL SUPPORT Account manager(s) availability Account manager(s) capability and Knowledge Depth of support High level of accuracy Dependable Anticipate issuesACQUIRING VEHICLES General ease Accuracy Emergency needs CapabilityDELIVERY VEHICLES Planned and communicated well Convenient for drivers Drivers treated wellMANAGE VEHICLE IN-SERVICE License management Accident management Maintenance management Operating cost tracking and control Safety management Fuel management Expense reimbursementUSED MARKETING Manage sales to employees Sales through other methods Documentation Reporting Resale value reporting Analysis of activity Depreciation managementINFORMATION MANAGEMENT Accuracy (e.g. billing) Flexibility of Reports Customised reporting Direct computer access

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OUTSOURCING – SHOULD THIS BE THE BUZZ WORD IN THE LOCAL FLEET INDUSTRY?

A high profile international team was once commissioned to study the impact of outsourcing on fleet management. Part of their report is highlight below for your information. Effective fleet management contributes significantly to an

organization. This contribution can be made directly to the bottom line in terms of direct savings, or can be indirect in terms of enhancing the performance of other staff.

Continuing justification for the existence of in-house fleet management, solely on the basis of new additional savings each year, appears to be difficult. In fact, a life cycle might exist for fleet management, whether it is performed in-house or is outsourced.

The worth of a fleet manager was evaluated from seven different perspectives, and all showed a net worth. Ironically, outsourcing of fleet management actually represents a further reinforcement of the worth of professional fleet management.

Even when outsourced, certain fleet management tasks continue in-house. Most fleet service providers need significant staffing support to perform the task formerly done in-house. Thus it may not be an issue for far greater efficiency when performed by an outside supplier.

Undoubtedly, a number of organizations have outsourced fleet management strictly as a way to reduce headcount. Others have outsourced after a study showed significant savings. Others have outsourced because of insufficient savings.

The survey and cases make it evident that many factors inside and outside of the fleet and the organization affect the fleet management outsourcing decision.

Fleet management as a function has survived rather well. It certainly has not disappeared. It has had its worth confirmed. Therefore, Fleet Management has continued to thrive, but in a different mode from a decade ago. The outsourcing option has put more pressure on in-house manger to justify their position.

Fleet Management has been in a period of transition. It has moved from an area of expertise that traditionally was performed almost exclusively in-house to one that can now be supplied from outside. The arguments for outsourcing focus most heavily on cost savings, but include a significant number of what appear to be fairly weak ones such as fashion and political expediency

The main point to keep in mind is that outsourcing is definitely not always the best option for managing vehicles in a company environment.

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So before you make a decision on whether to outsource or not – you need to review some of these basic fleet management concepts.

THE THREE CORE MANAGEMENT SEGMENTS

In its simplest form, Fleet Management is involved in THREE core areas:-

POLICY DEVELOPMENT

These are the rules and regulation that set out your polices related to the fleet operations, for the vehicles and the drivers.

YOU CAN’T OUTSOURCE THIS FUNCTION BUT YOU CAN GET ADVICE

ADMINISTRATION

This is the actual management process that delegates responsibility and authority to various managers, internal or external systems to actually run the vehicles and control the drivers.

YOU CAN OUTSOURCE PARTS OF THIS FUNCTION – PROVIDED – YOU MANAGE THE OUTSOURCE COMPANY WITH STRONG SERVICE LEVEL AGREEMENTS

COST MANAGEMENT

This is the key to ensuring that the fleet operates at accepted cost efficient levels within the company and type of industry. Cost information must be combined with usage, i.e. kilometres, to ensure that one has the appropriate information. This information is usually expressed in terms of Rands and costs per kilometre.Like any business process, costs or budgets give feed back as to how effective the policies and administration are.

YOU CAN GET THE OUTSOURCED COMPANY TO PROVIDE YOU WITH CERTAIN INFORMATION ON COSTS BUT YOU HAVE TO MANAGE COSTS AND OPERATIONAL EFFICIENCIES THROUGH YOUR OWN FMIS.

DO PROPER MARKET RESEARCH – CHECK THE POTENTIAL SUPPLIERS CREDENTIALS

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If you think it would be a good idea to go the outsourced supplier route you need to do a check on the company’s credentials in the market. The list below will help you ask the right questions.

How many years of fleet management experience. Offers such services as maintenance management, accident

management, license renewal, national accounts program, and so on.

Can trust that the information they provide is accurate. The people I need to talk to are readily accessible. Provides access to top management. Has sophisticated data processing capabilities. Can depend on them to handle things quickly and efficiently. Offers competitive pricing. Features pricing equity with consistent initiatives for improvement. Can trust them to sell used vehicles for maximum value. They are always looking for new and innovative approaches. They know my company and its particular needs. They understand our objectives as a fleet and as a business. Make me aware of new information related to fleet management. They have a local contact person. Their information, such as brochures, newsletters, is helpful. Their paperwork and forms are easy to understand and easy to use. Will make suggestions for improving my company’s fleet. Doesn’t just react to problems but tries to anticipate them before

they happen.

THE OUTSOURCING versus IN-HOUSE FLEET MANAGEMENT DEBATE

The debate has raged for some years about outsourcing fleet management operations. It is not as one sided as it seems. What follows is some background information for you on the overall philosophy of outsourcing in the corporate environment.

As companies work to streamline their activities, they are discovering the advantages of purchasing certain goods and services from outside

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suppliers.

Financial advantages, coupled with the ability to hire outside experts in any field on an as needed basis, have fueled the increasing popularity of outsourcing, even for companies that once regarded self sufficiency as a corporate objective.

Traditionally, companies have outsourced some services, such as payroll preparation, accounting, advertising and legal services. What’s new is the trend of purchasing goods and services that had previously been handled internally, such as facility maintenance, fulfillment and distribution, secretarial services, computer network management and maintenance and sales. In fact, three out of ten large industrial companies in the USA now outsource more than half of their manufacturing.

Both outsourcing and in-house production can offer economic and quality benefits. A company’s philosophy structure, financial goals and mission will influence whether a function should be handled internally or outsourced.

WHEN SHOULD YOU OUTSOURCE?

Outsourcing offers many advantages for today’s company. The decision to use outside suppliers in some cases may be a function of the corporate “mission” or philosophy. Anything not essential to a company’s core business and not inherently profitable is a prime candidate for outsourcing. Outsourcing enables access to specialists in nearly every field. It may also allow increased savings in materials and labour and help the company to handle uneven work flows.

OUTSOURCING TO OBTAIN EXPERTISE

Many companies outsource to obtain expertise that does not exist internally. In some cases, the decision is obvious. Contracting for legal and accounting services, using the services of an architect and builder for facility additions, hiring and advertising agency to produce television advertising are some common examples. In other situations, the decision would depend on a company’s careful evaluation of the experience and talents of company personnel.

Companies can benefit from outsourcing because specialists in nearly every profession can be employed on a project or short term basis. This enables companies to use the expertise of professionals in areas such as Fleet Management Accounting, marketing and research without the cost of hiring and training additional employees.

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In particular, if a firm needs to develop specialized systems, it may be more practical to use an outside supplier to handle a one-time project. For example, a company would most likely turn to an outside expert to develop specialized communication systems, engineer and install new plant equipment or set up a proper fleet management operation.

OUTSOURCING MAY OFFER COST SAVINGS

Viewed from a wholly economic perspective, outsourcing can be a way to take advantage of a supplier’s lower cost structure. Major auto manufacturers, for example, purchase many components from suppliers because the supplier’s cost structure is significantly lower than the manufacturers' own. In addition, the manufacturers don't have to bear the financial burden of equipment purchases and installation, staffing, operating and maintenance costs. And when component specifications change, high volume suppliers can meet new needs in short order.

This ability of high volume suppliers to adapt to customer needs quickly is another economic benefit of outsourcing. The considerable “clout” of big customers means that suppliers will move quickly to meet their needs and to correct problems. A speedy reaction within a company's own organization may not be possible or financially feasible, particularly of profitability does not depend of a fast response.

OUTSOURCING TO CONTROL WORK FLOW

Volume fluctuation may be another reason to choose outsourcing. If the work load in one area fluctuates dramatically, it may be more cost efficient to utilize the services of an outside source to handle the overflow, rather than adding an employee who may be underutilized most the year. At tax time, for example, most companies use the services of an auditing company to handle audits and document preparation.

Outsourcing may be preferable, for example with fleet operations, if a company needs an outside perspective on its operations. Firms often use the services of a Fleet Management consultant to help them improve cost management and the operational functions of their fleets. This Fleet Audit process would necessitate an objective viewpoint, one that’s free of personal bias and corporate agendas, to be most effective.

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WHEN SHOULD YOU USE IN-HOUSE PRODUCTION?

Although more and more companies have turned to outsourcing, some factors may make it necessary for companies to produce many, if not all, of their goods and services in-house. Companies may choose in-house production because some components of their core business may be regarded as too sensitive to be handled by an outside vendor. In some cases, corporate policy dictates that core products and services cannot be outsourced. In other instances, production necessitates the use of proprietary technology and equipment that count not be easily duplicated by an outside source.

BUSINESS COMPLEXITIES MAY DICTATE IN-HOUSE PRODUCTION

The complexity of the business may also make the use of an outside supplier costly and inefficient. For example, some staff functions require highly specialized training and knowledge. Companies may also have custom billing, handling and distribution systems that from a practical standpoint could not be outsourced.

In-house production may be preferable too for companies that price at high volume and can “staff up” cost effectively. Industries that utilize unskilled worked can often maintain sufficient labour force to handle peak period. This also enables the companies to avoid paying the margins that purchasing the goods and services from outside suppliers would entail.

CONTROLLING BUDGETS WITH IN-HOUSE PRODUCTION

In addition to eliminating the supplier’s profit margin, handling production internally may allow a company to control and track costs more effectively. When production is outsourced, there is always the possibility that suppliers will increase prices unexpectedly; fail to provide quality products; be unable to deliver the product quantity needed; or even go out of business. Controlling all production internally can minimize a company’s outside risk.

MAINTAINING CUSTOMER AND EMPLOYEE RELATIONS

The need for direct interaction with employees and customers may be another reason for a firm to maintain in-house services. For example, companies generally prefer to handle their own product ordering and customer service operations because they want to foster positive interaction between their own employees and the customers. Companies may also keep the employee training functions in-house in order to cement cooperation and build relationships between management and employees.

IN REVIEW

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Whether a company decides to outsource or to keep processes in-house depends on a number of factors, including the firm’s area of business, corporate philosophy, financial position and number of employees.

With the many new and innovative outsourcing possibilities, the range of options depends on each business, many offer the corporate manager substantial benefits in terms of cost savings and access to expertise that is not available internally.

In today's corporate environment, any option that can help to increase efficiency and add to the bottom line should be considered.

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IF THESE CONDITIONS APPLY, YOU SHOULD CONSIDER OUTSOURCING

Expertise in the process resides outside your organization

The outside suppler has a lower cost structure than your own

Your need for the product or service is not strategic to your business

You’re interested in an outside perspective on your operations

IF THESE CONDITIONS APPLY, IN-HOUSE PRODUCTION OR SERVICES MAY BE PREFERRED

Your requirements are to complex for outside suppliers to handle

Your need for the product or service is stable and constant

You have high enough volume to staff up and achieve economies of scale

The process is strategic to your business

There are ancillary benefits to handling the process internally

IT IS TIME TO TAKE GOOD LOOK AT YOUR OWN FLEET OPERATION AND APPLY THESE CRITERIA!

Here is a final checklist that you can use to assess a potential outsourced supplier

FLEET OWNER CONCERNS

FLEET OPERATING NEED

FLEET SERVICES OFFERED?

RESOURCE AVAILABLE?

Supplier evaluation

Supplier evaluation

POLICY Guidance on policy

Internal audits, check lists, policy guidelines; fleet audits

Various check lists and survey documentsConsultingFleet Management online training

ADMIN-ISTRATION

Internal and/or outsourcing methods

Evaluation and procedures check lists

Various check lists and evaluations

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ConsultingCOST MANAGEMENT

Best method to do this? What services are available? Cost comparisons?Internal Fleet Management programme

Information on key issuesCost/vehicle trendsRands and costs/ kilometresStatistics

Current fleet/vehicle cost trendsCost analysisComparisonsFleet management system for client use

SELECTION

Operating costs; specs; prices; general informationAdvise, comparisonsGeneral information

Pictures; basic specs; prices; fleet segment fit; costs/ kilometre calculator

Current information; costs/ kilometre calculatorVehicle fleet fit allocationFleet check (vehicles)

PURCHASING

Discount policies; order system; timing/tracking; price protection; SVO’sOne stop shop

Information; methods; dealer liaison; allocation tracking and control of orders

Policies; dealer liaison method; order tracking systemPurchasing system for new and used vehiclesDatabase of vehicles

FINANCENEW AND USED VEHICLES

Best choice to assist cash flow and costs, credit lines, quick approvalsSimple administrati

Leasing; Installment Sale; Rental; FML; Finance calculator; simplified decision maker;

Finance/decision calculatorsSimple DCF programmePros and cons tables of financingRV

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onCompetitive ratesWell structured programmes

DCF’s; current programmesExecutive finance/FML

programmesRV insuranceProjected Resale ValuesExecutive finance

MAINTENANCE

Pros and cons of maintenanceIn-house vs. Maintenance Management and Maintenance PlansCosts; rates; discountsWarranty programmes

Information; discount rates; MP rates; parts basket comparisonsExtended warrantiesSpecial discountsMaintenance programmes

Current information; MP rate matrix; method pros and consWarranty programmesP&A and AccessorySupplier programmesBranded Card

REPLACEMENT

Optimum replacement timing decisions; repair or replace decisions

Simplified replacement program

Computer programmeUsed Market statistics, evaluation etc.,.Economic trends, etc.,.

USED VEHICLE MARKET

Current/projected resale values; best methods; depreciation managementEconomic trendsMarket analysis

Information by modelResale value matricesManagement conceptsRemarketing programme

Research information simply presentedUp to date market informationFleet programme

TEST DRIVES

Provide vehicles as

Planned test drive

Proper control

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AND VEHICLE EVALUATION

required programDealer control/liaisonFleet feed back

system through dealers; feed back; analysis

VEHICLE ALLOWANCE DRIVER AND EXECUTIVES

Pros and cons; allowance needed; tax implications; Total service

Proper guidance on fleet operations; information; pros and cons guidance

Tax/allowance calculators; tax tables; guidelines informationSpecial programme for fleets/executives

INSURANCE

Comprehensive and self insuranceCost/method comparisonsVehicle allowance schemesAccident management

Various insurance programmes at competitive ratesEasy and quick applications/approvalsAccident management programme

Comparisons and guidelinesBroker servicesStatistical reporting system/management programme

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CHAPTER 14

FULL MAINTENANCE LEASING

Probably the main benefit of choosing the full maintenance leasing (closed end lease) route is the fact that you buy vehicles at a fixed cost per month and that there is no risk in the in terms of the market, resale values and maintenance costs. In the international market, this service is called by different names, such as ‘closed end’ leasing in the US.

In some ways it is similar to ‘leasing’ as it is called in the US but in this instance the risk in the vehicle from a resale and maintenance point of view is carried by the leasing company.

The information covered in this chapter will help you to –

Understand the business of Full Maintenance Leasing. Know the pros and cons of using this vehicle

management method. Learn the advantages of choosing this method. Make the choice using sound business principles.

AN OVERVIEW OF FULL MAINTENANCE LEASING

Some companies that change from paying cash for vehicles switch to full maintenance leasing (FML). Often the main objective is to get the vehicles off balance sheet. The full maintenance leasing system involves the company paying a FML company a fixed month rental for the use of particular vehicle for a pre-agreed period and kilometres.

Charges usually cover all servicing and maintenance costs. The company never owns the vehicle, cannot claim depreciation for it and takes no risks in its residual value. The vehicle never appears on the users balance sheets. The company can however, charge the rental payments directly against profits as an operating cost. VAT tax inputs can also be claimed on the administrative fees and maintenance costs.

Full Maintenance Leasing can offer a solution to fixing fleet operating costs. Below are the pertinent issues and advantages which are applicable to these programmes.

1. Simplified budgeting and forecasting as costs are fixed for the duration of the contract. (The only exception is when the finance portion is linked to the prime overdraft rate). The risk now lies with the Full Maintenance Leasing Company when maintenance, labour and tyre rates increase.

2. The contract period and distance allowed is totally flexible suiting each individual driver. This is reviewed regularly to avoid

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penalties upon termination of the contract should the driver exceed the kilometres calculated.

3. The administration load is minimized, as the Full Maintenance Leasing company will control the entire administration function for your fleet.

4. FML provides off balance sheet funding which improves asset and gearing ratios.

5. Capital will be made available for investment in income generating opportunities, as there is no capital outlay when entering into an FML contract.

6. Monthly payments are fully tax deductible as an operating cost thus being a tax saving benefit.

7. FML companies now differentiate between the finance portion and maintenance costs on each contract which enables your company to claim the relevant input credits on maintenance costs.

8. Best fleet discounts are passed on to you because of the FML company’s purchasing power.

9. Authorization of repairs is handled by the FML company together with the scrutinisation of invoices. This again eases administration burdens and allows more time to manage your own business.

10. Recurring technical or service problems which you may encounter will be handled and resolved by the FML Company.

11. Purchasing and licensing is all included in the FML package, once again alleviating administration problems.

12. Purchasing and disposal of vehicles is the responsibility of the FML company, there is no risk to your company at the end of the contract.

13. Vehicles can still be purchased by the FML company through any dealers you may wish to continue supporting.

14. Vehicles can still be purchased by employees by pre-arrangement with the FML company.

As you can see from the above points, there are numerous benefits to a company who may be contemplating a change to Full Maintenance Leasing.

EVALUATION OF POTENTIAL OUTSOURCED SUPPLIERS

To help in your evaluation of an outsourced supplier’s services, you should use the decision grid method shown below because it will add some measure of quantification to a difficult job of qualitative assessment.

Rankings in each category are on the “10 Point Must System,” i.e., at least one supplier must get a “10” in any particular category. Then, any other supplier must be rated in that category between “1” and “10”. Thus, the evaluation is relative to the best within the category.

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It would be possible to have two or more suppliers ranked with a “10”, but at least one always will be.

We have included a number of categories which we believe should be incorporated in your assessment. You can add others as you wish, based on your objectives and priorities. When you add up the points, it may not be absolutely clear who’s best – there are many subjective areas. Each of these specific fleet management aspects needs careful evaluation, in terms of your own business needs.

In general terms, the supplier evaluation grid will help you to

Quantify qualitative issues Obtain an objective frame of reference Develop a systematic approach May be not pick the winner – but you can identify the losers

Supplier Evaluation Grid

Supplier Evaluations – Rank each 1 to 10 (10=high, 1=low)

Category

SupplierA

SupplierB

SupplierC

SupplierD

Continuity of Client RelationshipsIndustry ReputationPersonnel StabilityPersonnel ExperienceAvailability of Top ManagementClient/Supplier “Chemistry”Quality Assurance ProgramsReference Check FeedbackQuality of Proposal ResponseVehicle Ordering SystemsImmediate Vehicle Needs CapabilityManufacturers’ Incentives Control SystemsVehicle Pricing FormulaFunding FlexibilityFunding Cost – Interest RatesOverall Price CompetitivenessCommitment To Pricing EquityVehicle Remarketing SystemsVehicle Remarketing ResultsMaintenance Management System

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Electronic Communications AvailableElectronic Communication SupportReporting FlexibilityAccounting Cost Allocation FlexibilityPerks Tax/ Tax Issue ExpertiseRegistration AdministrationManufacturer and dealer supportQuality of Consulting on Fleet IssuesUser Friendliness of SystemsNew Account Integration & ImplementationFleet Industry Support Total

The company with the highest overall total points is potentially the best option

The FML Company’s services

The supplier Grid helps you to compare the core services being offered by potential suppliers from a holistic point of view. It would also be prudent to do some in depth analysis of the services being offered by the different suppliers.

The following check lists are provided to assist you to do an in depth analysis of the top supplier. Doing this evaluation will also assist you in developing the extremely important Service Level Agreement with your outsourced supplier. A simple YES or NO answer is required for each item but you could also use the 1 to 10 grading method.

GENERAL ADMINISTRATION AND MANAGEMENT

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1 Are all costs associated with the management of the fleet included in the proposal and proposed costs?

Yes No

2 Does the company have the capability to service the drivers effectively?

3 Can drivers or management call the company for operational support?

4 What benefits does the company belie it can offer our management team (s)?

5 Is there a programme or method to get feedback from the drivers?

6 What level of client services will be provided?7 How do the programmes you provide really control

costs and assist in budgeting and planning?8 Are you flexible enough to deal with our various

companies and fleet management needs?9 Is fleet management your primary business?10

How accessible is your senior management?

11

What are your basic business philosophies in respect of fleet management?

12

What are your systems capabilities to support the programmes being offered?

13

How many customers and vehicles do you presently control on all your various programmes?

14

How many employees do you have?

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Please attach a copy of your contract (s) with your report and proposal.

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Name at least 10 of your current major clients using your services, highlight any specific successes.

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Indicate any new services or current programme improvements that are planned over the next twelve months.

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How many vehicles do your currently have on your various maintenance programmes?

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Explain your month-end administrative, invoicing and payment procedures.

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Do you provide any regular publications related to your maintenance programmes?

21

Please explain your motor manufacturer and dealer relations in respect of operating your programmes effectively and efficiently.

NEW VEHICLE PURCHASING

1 Please provide examples of the various forms used Yes

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and the appropriate instructions used. No 2 What arrangements do you have with the

manufacturers/dealers to ensure timeous supply of ordered vehicles?

3 What information do you supply on a regular basis to assist with the planning of vehicle purchases?

4 Is there freedom of dealer choice based on our current purchasing arrangement?

5 Do you have arrangements with dealer(s) to deliver vehicles to our various locations?

6 Does your purchasing system provide for options if the vehicle specified is not available?

7 Please explain your policy on discounts and residual values.

8 Do you provide an instruction manual?9 Please explain how your purchasing department

operates and the number of people involved?

FLEET MANAGEMENT REPORT SYSTEM

1 Please give details of your system in respect of cars, LDVs, Trucks, Equipment.

Yes No

2 What basic reports are provided in respect of:- Financial accounting?- Asset management?- Fleet management?- Budgeting and statistics?

3 What optional reports are provided?4 Explain your timing cycles related to input reports

and delivery.5 Explain what electronic outputs are available to

use with an internal fleet management system.6 Is microfiche available?7 Explain vehicle asset management procedures

related to new vehicle take-on, disposal, and changes.

8 Explain how VAT is handled and how this is reflected on the reports provided.

9 Explain your fee structure for the reporting system:- Basic report set- Options- Electronic data

10

What fleet management services are provided in respect of your consultants? Who would provide these services and what experience would the people concerned have?

1 Are there any fees for these above mentioned

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1 services?12

Are you in a position to develop a fleet operating policy for us? If so, how would this be done?

13

Please explain any other support services provided by your company.

FLEET CARDS

1 What fleet cards are provided, e.g. credit card, charge card?

Yes No

2 Explain administrative procedures for issuing cards to the company/drivers?

3 At which outlets can the cards be used?4 Explain your policies regarding card limits and

how these are controlled and authorized.5 What protection is there against fraud?6 What purchases can be made suing the fleet card?7 How is the issue of vouchers handled?8 What administrative procedures are used to

ensure proper control over the vouchers?9 Explain all your card fees in detail?

- Card fees- Interest charges- Administration fees- Transaction fees- Lost card fees- Other fees

10

Is it possible to provide an in-house system with a personalized card?

11

How are in-house purchasing points handled, e.g., in-house workshops, bowsers, etc.

12

Explain in-house administrative procedures required for input purposes.

13

What future card developments are likely in the next 12 months, e.g. smart cards?

MAINTENANCE MANAGEMENT

1 Please explain the various programmes that are provided, e.g., maintenance plans and maintenance management.

Yes No

2 Under each programme, please provide information on the following points:

* Can a specific fund be provided for the overall fleet?

* Can the fund be split between various sections of the fleet?

* Is it possible to operate the funds on an overs and

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unders basis?* Can losses and gains be aggregated?* What is the fee structure for these programmes in

respect of vehicles, Light commercial vehicles and commercial vehicles?

* What is the fee structure for these programmes in respect of vehicles, Light commercial vehicles and commercial vehicles?

* Are you prepared to evaluate the fleet in order to ascertain which of your various programmes can be used?

* Please explain who carries the risk and how this can be limited and controlled.

* Are there any incentive schemes?* Please explain any variations that would be

available in respect of monthly payments, e.g., advance payments.

* Explain your procedures when a vehicle is taken to the dealership, e.g., type of card, authorizations, invoices, vouchers, signing job cards, driver responsibilities.

* What dealers are used for repairs, services, accessory repairs, batteries, tyres, exhaust, and shock absorbers?

* What special purchasing programmes are available for the above mentioned items?

* What level of support is available if the driver experiences difficulties?

* Explain whether in-house workshops can be controlled under your programmes. What administrative procedures would be required?

* How much has your maintenance fund costs increased over the last three years? What cost escalation's do you project over the next two years?

Yes No

* Can vehicles be serviced at places other than the franchised dealer?

* Explain your procedures if emergency repairs are required. Also procedures if such repairs are required “after hours”.

* Do you operate a toll free line in your maintenance department?

* Do drivers receive an up-to-date manual on all procedures?

* What management reports are provided to assist in managing the fleet, e.g., kilometres, VAT, fuel purchased? Can these reports be structured to

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suit the fleet hierarchy?* Explain how tyres are incorporated in your

maintenance programmes? What standards or rules do you et in respect of tyre usage?

* Can your fleet management card be used for petrol purchases? If not, do you provide a separate petrol card?

* Are temporary vehicles available? If yes, please explain your administrative procedure.

* Please indicate the monthly charges for the specific vehicles provided on the attached list. The monthly charges should indicate:- Monthly kilometre rates- With tyres - in Rands and costs/ kilometre- Annual escalation's- Without tyres - in Rands and costs/ kilometre

* Explain early termination procedures and financial implications.

* Should a vehicle be involved in an accident, what are the implications, if any, in respect for the maintenance programmes being provided?

* Are you linked up to any emergency services, e.g., the AA, which supports the driver and the vehicle?

* Explain your polices in respect of accessories and external equipment fitted to vehicles.

* Do you provide an accident management programme?

NEW VEHICLE REGISTRATION AND ADMINISTRATION

1 Please explain your normal registration procedures.

Yes No

2 How do you handle annual license renewals?3 What are your procedures for handling fines?4 How is this department organized?5 What insurance programmes are provided?6 Please explain how this programme is operated

and who the underwriters are.

INSTALLATION AND GENERAL ADMINISTRATION

1 Explain your administrative procedures in respect of installing your system in general terms. What manuals are provided? What time frame is required for installation?

Yes No

2 What information would need to be provided during this phase? In what format is it required?

3 What support is provided to ensure a trouble free

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take over by you?4 What validity checks are implemented to ensure

the accuracy of the input data?5 Explain any general or ongoing procedures that

are likely to impact on your normal business operations.

6 What information is provided for comparative purposes to ensure that we are managing our fleet effectively?

USED VEHICLE MARKETING

1 Please explain your normal disposal procedures in relation to employee sales and industry.

2 What statistics do your provide in relation to the used vehicle market/

3 Do you provide used vehicle condition reports to assist in setting reserve prices?

4 How do you determine the prices of used vehicles?5 How do you sell most of your used vehicles?

FULL MAINTENANCE LEASING DISADVANTAGES

Unfortunately, like anything else in the world, this type of vehicle management service has its full share of disadvantages. You will need to take these into account when and if you decide to use this type of vehicle management service

Overall cost — the biggest disadvantage of FML is that your costs over the life of the asset are generally going to be higher than if you purchased the asset. This is because your rental payments must compensate the lessor not only for acquisition and financing costs, but also for the lessor's retained risk of continuing ownership.

No ownership interest — your lease payments do not establish any equity in your leased equipment. In other words, at the end of the lease you won't have a tangible asset to show for your payments. This can be especially costly if you have underestimated what the equipment would be worth at the end of the lease.

Lost tax benefits —the potential disadvantage of leasing is

losing the tax benefits of depreciation deductions that come with ownership. This disadvantage may be insignificant, however, if the "lost" benefits are offset by your ability to deduct your rental

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payments or if you have insufficient income or tax liability to be offset by the lost deductions and credits.

Commitment to property — once you sign a lease agreement, you're generally committed to making payments for the entire lease period even if you stop using the vehicles. Most equipment leases are either non-cancellable or impose a penalty for early termination.

THE SERVICE LEVELS OF A FLEET MANAGEMENT COMPANY

You might already be using an outsourced supplier for your vehicle management needs. You also might well have a very good relationship with them. However, the opposite might also be true. This information will help you do a review on current matters. You could also use one of the previous checklists to do the same thing.

Service levels in this industry vary considerably from country to country. A lot of blame however, has to be laid on our own door steps as vehicle managers. More often than not, the simple reason is because we have accepted these poor standards. In many instances it is because vehicle managers are not aware of the specific standards of these services that the leasing companies should be providing.

John Kay an eminent academic at Oxford University’s new School of Management Studies feels that “You can’t run a successful company if you don’t care about customers and employees or if you are unpleasant to suppliers”. It’s not mind shattering stuff, but it does highlight an issue that is not always in the thinking of the executives of service organizations.

Many fleet owners make use of the FML companies, Leasing companies and Bank Fleet Card operations. The question is “How often have you really evaluated their services in terms of what you pay over a year?” If you have a fleet of 100 vehicles, you are probably paying in the region of R78 000 in fees and interest for the use of a fleet card system.

If you make use of an FML company as well, then you can add at least another R600 000 a year. This would relate to the additional services and administrative costs you would pay as part of your monthly rentals. Remember this is apart from any internal costs for your own executives. These are significant sums of money to pay for the “services” of these companies.

The Fleet Management industry is going through quite significant changes as competition intensifies. There is no doubt that the different Fleet Management Service Providers are looking at their

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market positions as they try to improve their services and market shares.

So the question is, “what should or could they be doing to make life easier for you as a fleet owner?” Here are some ideas to help you judge the service orientation of the company you currently use, or might be thinking of using. Just remember though that the cheapest fees or rates do not necessarily mean the best!

AUTOMATION: In today’s high tech business environment, automation tends to be a given. However, as an aside, it is surprising how many companies still receive printed reports when direct access on an “as and when” basis would be more effective. In the long run it is still the level of individual customer service that really counts.

PERSONALIZED SERVICES: You should have been told who the different people are that will provide services to your fleet. You also need to know the different levels of assistance available to you. You need to know what to expect when you place an order or query a cost on your monthly reports. There should be a central point of contact in the company that can handle your query or direct your query to an appropriate person within a reasonable time frame.

Companies tend to rely on their semi trained switchboard operators, who are often over loaded to direct calls properly. Your fleet company should ideally have different phone numbers for direct access to its various departments, e.g., purchasing, maintenance, management, disposal, etc.

RESPONSE TIME: Not too many business executives have time to waste, especially if the problem to be resolved is not related to core business. Your fleet company should have indicated how it handles queries and normal business. If return calls by phone or personal calls are necessary, you should be able to agree to response times. Actually you should have been informed how it works.

STAFF BACKUP: It is often difficult to find your allocated account executive just when you really need the person. However, there should be a backup person who is familiar with your fleet operations and able to answer your queries. You don’t need to be chasing around the place to get information or answers.

FLEET MANAGEMENT KNOWLEDGE: If a company provides a fleet management service, it is reasonable to expect that their staff have a thorough understanding of the motor industry and vehicle management issues. You should be able to receive a direct response from their support staff in respect of your problem or query.

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FLEET MANAGEMENT OPERATIONS: Your fleet, however big or small, is one of many that the fleet company services. Your needs should be anticipated and continually addressed. This can only be done if there is a regular exchange of information on fleet management matters or perhaps a formal survey to assess situations or needs. Your fleet company should be PROACTIVE, NOT REACTIVE in providing appropriate advice or services.

SERVICE EVALUATIONS: This should be done regularly by your fleet company. In fact they should be constantly asking you how they are doing. More importantly, they should be actively showing you how much they are concerned and what they are doing to improve their services to your company.

TOP QUALITY SERVICE: To some extent, you as fleet owners are to blame when service levels are below standard. It has been my experience that fleet owners simply accept below level services or change without saying anything to their fleet company. Meeting minimum standards should not be acceptable. Your vehicle management company should have been selected, because they go the extra mile and offer a better service, at a market related price.

FINAL THOUGHTS: Running a vehicle fleet costs a lot of money these days. If you use a FML company, a leasing company or Fleet Card, their relationship with your company is a critical link in keeping operating costs under control. It is no good paying for their services and finding out that your costs are still out of line or escalating at an unacceptable rate.

It is important for you to continually evaluate your outsourced vehicle management supplier and their commitment to providing you with all the components of a quality fleet management service.

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CHAPTER 15

VEHICLE ASSET MANAGEMENT

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.

T

hTThe information in this chapter will help you to –

Establish the over and underutilised vehicles Set the appropriate usage levels in each department Calculate availability percentages Determine and allocate ‘critically’ required vehicles Right size the fleet

THE BASIC METHOD USED TO EVALUATE UTILISATION

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.

The general fleet management procedures and policies that need to be adopted to manage these processes are explained below with appropriate comments and recommendations.

With reference to the requirement to analyse user needs and vehicle composition against business needs. This exercise can only be done effectively once the full procedures and fleet management systems are fully implemented.

The following diagram illustrates the filtration or screening process that should be used. The approach is to use screening techniques in order to home in on the specific vehicles that are either above or below the utilisation limits.

.1. REQUIRED General OBJECTIVES

Asset registers by department by vehicle type

Set utilisation levels – age levels etc.

Filter under utilised vehicles – 75% of annual average

Filter over utilised vehicles – 125% of annual average

Filter over age vehicles – e.g. over 10 years.

Analyse business case where applicable to retain vehicles

Allocate vehicles to be removed or reassigned

THE FLEET FILTER AND ALLOCATION PROCESS

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The overall objectives in respect of right sizing and utilisation should be contained in the main fleet management policy document. These objectives should be developed to ensure the following –

All fleet vehicles must be identified and accounted for in the fleet management information system with vehicle records, containing all the relevant information related to utilisation and availability, updated on a regular basis.

The size of the fleet and pre-specified types of vehicles selected must be appropriate to meet the needs of the departments.

Fleet costs and other performance measures needed to manage the correct utilisation and availability of vehicles must be tracked and reported in a timely manner as stipulated in the general fleet management policy.

Vehicles must be maintained in accordance with manufacturer guidelines.

A proper replacement cycle must be in place for all vehicles.

2. RESPONSIBILITIES that need to be defined

Departmental fleet managers. These managers must provide overall management of all vehicles and transport management within their departments. This should also include long-range strategic planning, fleet management, outsourced supplier management and performance evaluation. These responsibilities must be clearly defined in the main fleet policy document.

Vehicle Utilisation Review Committee.This committee should be established. The committee should be responsible for monitoring the size and utilisation of the fleet and making recommendations for changes concerning vehicle assignments and allocations in departments. The committee must also assess the number of vehicles needed for each department on an annual basis. Replacement policy and related operating costs and other information must be used to submit capital requirements for the next year’s budgets.

Vehicle User DepartmentsThe fleet manager/ departmental heads must ensure that the vehicles are: Properly designed and specified for the job to be done; Operated by a fully trained and licensed driver; Used in a safe and non-abusive manner by all drivers and

operators; Maintained according to schedules provided by fleet

management;

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Utilised at a kilometre rate that justifies continued assignment of the vehicle;

Drivers and OperatorsDepartments and drivers must ensure that vehicles are maintained in accordance with the specified maintenance schedules. This means vehicles should be inspected before and after use. Problems need to be reported immediately by either the workshops or the fleet managers. The Availability Reporting system must incorporate these reports and the action required, to keep the vehicle operating within the required/ benchmarked operating cost standards.

3. Performance STANDARDS

The organisation needs to develop certain reports with specified benchmarks related to the overall fleet operation in terms of utilisation and availability. The ‘actuals’ against the benchmarks need to be published on a regular basis in order to track ongoing performance. These reports would be used by the Vehicle utilisation Review Committee to assess these operational criteria on a regular basis. The main reports required are listed below.

Variable Costs – in Rands and cents per kilometreThis is a report based on all variable costs – fuel, repairs, maintenance, tyres, services, etc. This report is explained in more detail in the overall fleet management report. The report should show each individual vehicle’s cents per kilometre as well as an average for each of the different vehicles types by department.

Budgeted Hire Vehicle Cost vs. ActualThis is a report that must show the actual hire costs compared to the total budgeted amount for vehicle hire by department on a monthly basis. If the fleet’s standards for the correct allocation of vehicles have been formally established together with the target utilisation levels, there should be very little need to hire vehicles for normal operations.

Business reasons for the use of hire vehicles should be formally motivated and approved by a central point.

Accident CostsThis report should show the total annual cost of accidents in the format recommended in the main report. Driver abuse and related repairs should also be reported. Drivers need to be disciplined as and when required using this report. Accidents create downtime of up to three weeks. This affects availability and needs to be monitored on a monthly basis.

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UtilisationThe user departments must develop average, minimum and maximum utilisation goals for each type of vehicle being used in a department. These reports must be available through SAP and managed on a regular basis.

Report on underutilized/ over utilised VehiclesA six monthly report showing the number of vehicles in each department that have not met these criteria must be available to the departments. Appropriate action must be taken by the Utilisation Review Committee.

Pool Vehicle UtilisationA six monthly report showing the average utilisation and availability of pool vehicles in each department must be available to the departments.

Average of litres per 100 kms. A detailed report on fuel consumption must be available as part of the overall fleet cost management system for all vehicles. This must be in litres per 100 kms and in cents per kms.

Outsourced suppliers for vehicle maintenanceReports should be provided to show the costs of maintenance and repairs carried out by the different suppliers and the time taken to do the work. The reports should also be used to evaluate and compare various suppliers in a consistent manner. The Availability Reports should reflect this type of information.

Replacement planningThis report should show all vehicles scheduled for replacement, the reasons, planned dates for disposal, budget applications, purchasing procedures commenced.

4. FLEET AVAILABILTY

Managing vehicle availability is a key part of the fleet management processes. A vehicle has to be available in order to manage its utilisation. These two measures have a direct correlation to each other.

The level of availability also has a direct effect on the size of a fleet. For example, if 100 vehicles are required on a daily basis for a department’s work and only 80 are normally available for whatever reasons, the availability would be 80%. In practical terms, this means that the department actually needs 120 vehicles in its fleet.

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A monthly report is needed showing the number of vehicles that are currently available for each department’s total fleet. For example, if a department has 20 vehicles which should be available each day of a 22 day month this equals 440 vehicles days. If 2 vehicles are out of service for 10 days (20 days), the fleet availability for its vehicles will be 440 – 20 vehicle-days = 420 vehicle days.

The Availability Rate would then be 420 ÷ 440 = 95%. An acceptable availability percentage needs to be set in the first instance once these calculations have been made on the present fleet. This must then be managed upwards to an acceptable level for the departments

The availability report must also indicate the reason for a vehicle being unavailable e.g. service, maintenance, repairs, breakdown, accident. This report must be used in conjunction with the utilisation reports. The input for this information should come from a tracking system.

The tracking programme and Fuel programme must also be used and integrated into your FMIS to substantiate usage and kilometre readings. The right information must be easily available to the departments in order to make practical decisions on a regular basis.

It needs to be emphasised that without the records, as described above, related to availability statistics and availability targets it is impossible to complete a proper analysis of the right number of vehicles required for a fleet’s operations.

5. Fleet Vehicle Utilisation processes Utilisation Policy Each department should carry out an annual review of fleet utilisation in the middle of the financial year. The main objective of this review is to establish those vehicles which have not met the utilisation targets and to decide on the appropriate action to be taken for each vehicle.

MANAGEMENT PROCEDURES FOR UTILISATION MANAGMENET

The following steps are needed to create a utilisation management programme 5.1. Annual Vehicle Utilisation Report At the beginning the financial year the departments must create a utilisation report for every vehicle in the fleet. The report should be created in such a way as to allow calculations to be performed on the data. The following is an example of this type of report. The history for each previous year should also be included to provide a trend analysis.

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Department

Reference

SAP

Vehicle Type

Registration #

Year Make

Model Department

Average Annual Usage (kms)

5007012 Sedan CA 456718 2003 Ford Focus 1.6 sedan

Roads 32000

5007014 LCV single cab 4x2 petrol CA 765434 2001 Ford

Ranger LCV 4x2 Water 26000

 

5.2. Average Annual Vehicle Usage CalculationThe next step is to calculate the Average Utilisation Point for each type of vehicle used in the fleet in the above report. For example all the annual kilometres for a type of vehicle are averaged to get the current Average Utilisation Points. This would look something like the following report.  This report should be split up, based on the different types of work done by vehicles in the departments.

 Motor Vehicle Type 

Average Annual Usage for 2006- kilometres

Sedans/ Station Wagons 

29 000

Ambulances  35 000

Metro police sedans  30 000

  LCV’s 4x2   26 000

  LCV’s 4x4 S/C   28 500

  LCV’s 4x4 D/C   24 600

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  16 seater busses  30 000

  3.5 ton plus 15 000

  8 ton plus   14 000

5.3. Utilisation Target kilometres Calculation The next step is to calculate the “Utilisation Target Kilometre Points” for each type of vehicle used in the above report. This is done by multiplying the average annual kilometres by a prescribed factor. This is recommended to be 75% to calculate the lower limit and 125% for the upper limit as a starting point.

These values can be realigned by departments as the targets are refined within each department over the next twelve months. These Utilisation Target Points would then be as follows using the above report.

Motor Vehicle Type 

Utilisation Target PointHigh & Low kilometres

Sedans/Station Wagons 

2 1750 – 36 250

Ambulances  26 250 – 43 750

Metro police sedans

  22 500 – 37 500

   LCV’s 4x2   19 500 – 32 500

   LCV’s 4x4 S/C   21 375 – 35 625

   LCV’s 4x4 D/C   18 450 – 30 750

16 seater busses  22 500 – 37 500

 3.5 ton plus 11 250 – 18 750

   8 ton plus   10 500 – 17 500

 

5.4. Utilisation Target List

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 The next step at the annual review is to identify the individual vehicles within each type whose usage fall above or below the target kilometre point during the year. This will create a list of vehicles to be reviewed by the committee.

5.5. Notification to User Organizations The departments should then be informed which of their vehicles are on the target list. These vehicles should now be evaluated by the departments for possible action that could include:1. Removal to a vehicle pool. 2. Retention with required justification. 3. Exchanged for another vehicle of a similar type with higher/ lower

kilometres. 4. Exchanged for a different type of vehicle that is better suited for

the work. 5. Re-assignment within the department. 6. Placed on the vehicle disposal programme. 7. The continued use of a vehicle.

The attached reports now need to be evaluated by each department. This will obviously take some time and a planned time schedule must be developed to do this work.

5.6. Department action required  Departments must submit the required documentation for new vehicle purchases within the required time frame for budget purposes. Appropriate action must be formally recorded for analysis at the next review. This will require more information being recorded on SAP to maintain the integrity of these decisions e.g. on the asset register or a further compiled register.

5.7. Disputed Vehicles There may be specific needs or reasons to keep a vehicle that is on the target list. These vehicles must undergo a full dispute resolution process. If accepted for retention they must then be exempt for example – for another two years.

These vehicles should still be considered for exchange with higher mileage units of a similar type whenever possible in order to “balance” utilisation for the overall fleet. 5.8. Vehicle Exchange and Rotation Process STS must regularly promote full utilisation of each vehicle within all departments. This may involve rotating or exchanging vehicles to

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ensure each vehicle achieves its programmed life usage i.e. the pre-defined replacement programme. Rotation should be considered at any time during the year for any vehicle that consistently falls above or below the average utilisation for that type of vehicle.  5.9. Moving vehicles to a controlled pool  An alternative to keeping low usage vehicles in a department would be to move these vehicles into the central pool. Vehicle hiring should also be controlled at the highest level. This will ensure full usage of pool vehicles and reduce hire costs.  

5.10. Vehicles Excluded or Exempted from Utilisation Review Departments should be able to request exemptions to the minimum/ maximum kilometres specified for disposal, re-assignment or retention of a fleet vehicle. This is where utilisation goals are based on criteria such as passengers or tonnage vehicleried, hours, type of work e.g. high level of standby time, etc. The method to do this analysis is discussed below on the subject of creating a list of accepted ‘critical usage’ vehicles.

5.11. Replacement policies  This matter will be addressed fully in the main report. The following are general guidelines that are recommended to run a cost efficient fleet of vehicles. These periods/ kilometres should be used in the utilisation target processes. 

Vehicle type  Replacement Cycles

Passenger- vehicles 5 years or 150 000 kms

Light truck and General Purpose Vehicles

6 years or 180 000 kms

Trucks and General Purpose Vehicles 3 ton to 8 ton.

8 years or 200 000 

Heavy Trucks and General Purpose Vehicles over 8 ton 

10 years or 250 000 kms

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Truck Tractors and special vehicles e.g. Fire Engines

Based on replacement calculator projections. Work related.

 

5.12 Management must be tasked to coordinate all submissions

MANAGEMENT SHOULD COORDINATE ALL NEW VEHICLE SUBMISSIONS AND MANAGE THE REALLOCATIONS AND OTHER ACTIONS AGREED UPON WITH THE DEPARTMENTS IN TERMS OF UTILISATION AND AVAILABILITY.

5.13 Continuous vehicle Information Management is needed to manage utilisation

The different data sources available must be used to collect the necessary information required to manage utilisation, availability and the size of a fleet. The fleet management policy must cover input methodology from these sources and the data must form part of the overall fleet management information system.

These data sources which are listed below must not remain as independent data sources from a management point of view. They must be developed into a meaningful set of integrated reports.

Daily tracking reports of vehicle use related to availability. Regular reporting of odometer readings; Recording of odometer readings from the Fuel system.

Detailed reports must be generated within the whole suit of management reports to help fleet managers in the departments make informed business decisions on matters related to fleet size and utilisation.

RIGHT SIZING THE FLEET OPERATION

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1. GENERAL CONCEPTS.Once the utilisation method is in place and the results are available it will be possible to do the right sizing of the fleet. Setting the right number of vehicles for a department is an inherently difficult process. It depends to a large extent on the vehicle selection, replacement policies and the general fleet management policies. It is an accepted fleet management principle that no organisation can afford vehicles and plant that is not used on a cost efficient basis.Unfortunately, there is no quick and easy method to do this. It requires a long term approach that asks departments to forgo long held ideas about what is considered to be the right number of vehicles needed for their department. An optimised fleet sizing programme needs the following corporate actions in order to set up the fleet size management principles;

An organisational approach that ensures cooperation between the departments.

Operating cost management systems that raises awareness among departments and vehicle users of the fixed and variable costs associated with fleet ownership i.e. the total cost of operation.

An effective replacement program based on fleet management principles.

An effective fleet management information system that provides for the efficient collection, analysis, and distribution of fleet utilisation, availability and operating cost data.

An approved allocation of vehicles for each department starting with the current vehicles in each department.

A procedure for motivating the need for acquiring new vehicles (whether they are replacement units or additions to the fleet).

The main fleet management procedures that need to be introduced to assist in this process of right sizing the fleet are discussed below.

2. VEHICLE SPECIFICATION SHEETS. One of the main procedures to be developed in determining a fleet’s right size is the preparation of specification sheets for each type of vehicle to be used in the fleet. Department fleet managers must be provided with a standard way to document the criteria to determine a vehicle specification related to a specific job.

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3. FACTORS FOR DETERMINING THE RIGHT VEHICLE FOR THE JOB.

With the correct fleet utilisation information and vehicle specification sheets available it is possible to determine the right vehicle for the job. The basic following questions need to be considered when it comes to vehicle selection.

Who is the driver? What is the job? The person’s, physical size, age and gender?

Is the most important driver requirement productivity, comfort, utility, choice, safety?

What is the impact of standby time? What is the cost of standby time?

What is the impact of downtime? What is the cost of downtime? What is the cargo, tools, special equipment? What are the projected monthly kilometres? What are the driving conditions? On road and/or off road? What is the Total Cost of Operation for each proposed vehicle?

What are the operating costs (fuel, maintenance, depreciation, accidents)? What are the costs to own (acquisition, interest, resale value)?

Provision must be made for vehicle alternatives by job application (not job title) Assumptions must be constantly evaluated by getting feedback from the vehicle users and the departments.   Departmental managers must be guided by STS to make careful, comprehensive, defensible vehicle recommendations.

These recommendations must be recorded on the official vehicle specification sheets as part of the overall fleet management policy. This input must result in specification sheets being developed for each type of work in a department where a vehicle is required.A typical vehicle specification sheet that should be developed by departments for each of their vehicles is shown below.

Department/ work designation. Petrol 4x4 D/C LDV 2400 - 2800cc

REQUIRED SPEC

Hi Lux 3.0 D-E 4x4 D/C

Isuzu KB 300 TDI D/Cab LX

Engine Capacity2400 - 2800cc 2986 2999

Min power 67 kw 72 86Min Torque 192 Nm 192 265

Vehicle Configuration

4x4 Double

Cab LWB Yes YesPayload 750kg 1054 Std Susp. 690Ground clearance 215mm 225 220

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Load Body Clearance 380mm 440 345Volume per month   20 5Volumes available   20 50Delivery lead times   8 - 10 Weeks 6 - 8 WeeksMaintenance plan   No YesService plan   Yes No

Projected TCO230 costs/ kilometres 

220 costs/ kilometres

210 costs/ kilometres

Warranty  1 Year /

Unlimited 3 Year / 100000Comments   No No

   Once the required vehicle specifications have been developed and approved, it is possible to list the vehicles available from the OEMs and determine whether they are suitable or not suitable. An example is shown above with the Hilux and Isuzu vehicles. This method stops any unusual vehicles being put into the fleet simply because of personal/ pricing/ tender issues.

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4. JUSTIFICATION OF VEHICLES REQUIRED BY A DEPARTMENT. Sometimes a department must have a vehicle regardless of kilometres to be driven. Sometimes a vehicle is justified on the basis of the type of work involved. Sometimes a job requires a vehicle even if the vehicle has a high level of standby time.The following quantitative graph should be used to evaluate these different kinds of requirements that could be raised by departments. This is a typical business management concept that is used to evaluate conflicting requirements. The X and Y axis and kilometre utilisation targets would be set for the overall fleet and the individual departments when the utilisation targets are set. The critical usage percentage shown on the left axis will depend on relating a vehicle to a task and a judgment call of the relative importance of the task in the department involved. A realistic replacement policy must also have been established in order to keep these decisions in perspective.

Cri

tica

l nee

d 0%

50%

100

%

Lower limit 10000 kms

Upper limit 35000 kms

+ Fire EngineRetain vehicle in fleet

Vehicle over utilised + Storm Water vehicle LCV 4x2

Vehicle under utilised

+ Water Services LCV 4x4Retain vehicle in fleet

Average kilometres0 10 000 20 000 30 000 40

000

The position of a vehicle on the graph summarises its combination of utilisation and critical requirement. In this example - The Fire Engine should be kept because of its critical need factor even though its has a low kilometre usage – The water Services vehicle should be kept because it is within the utilisation target levels – The Storm water LCV needs to be reviewed, rotated or replaced.

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The vehicle position must be at least in the top left or bottom right boxes. If the vehicle is in the top right box, further analysis is required because usage that is over the upper utilisation target is as much a problem as is a vehicle that falls below the lower limit. The key concept here is that a vehicle can be justified either by defining critical usage or utilisation or by a combination of the two criteria. Until the model is fully developed and put into use over a twelve months period, kilometres, number of trips, and hours of usage will tend to tip the scales in the direction of functionalityThese calculations can be determined by either historical data or statistical projections. This calculation should be part of your FMIS.

5. THE BUSINESS CASE ANALYSIS IS REQUIRED FOR ALL UNUSUAL SITUATIONS. A standardised business case scenario must be developed for use in the total fleet or by the different departments. This must be done for all unusual vehicle usage situations.Other important factors, such as frequency and timing of use, general requirements for use, special characteristics of use, and location of use, must all be included in the accompanying business case analysis.Although a usage graph, like the one above, brings together most information needed for an acquisition/elimination decision, a full business case analysis should also consider the following criteria.

The alternatives to permanent assignment: renting, short term hiring, vehicle pools, employee kilometre reimbursement.

The frequency and period of the vehicle's use: an example would be the Fire Services reaction vehicles high usage in the summer months, typical times of use, ability to predict and manage when the vehicle is used.

The general requirements for a vehicle's use: the number of passengers, the time of use, types of passengers, criticality of the vehicle's availability to the user's job performance.

The specific needs related to the vehicle's usage: need to respond to emergency calls, vehicle appearance, need for auxiliary equipment, security of vehicle and contents, special equipment.

The area where the vehicle will be used: proximity to other vehicle users, near to the vehicle pool, the user's work place locations, location of maintenance facilities

A comparison to the established operating and cost benchmarks: operating costs, usage parameters, average percentage fleet availability, standby related to usage, response times, utilisation targets, etc.

6. THE NEXT STEP IS TO DEVELOP A TABLE OF ALLOCATED VEHICLES FOR EACH DEPARTMENT.

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The ultimate objective of continual utilisation and availability management must be to develop a standard table of vehicles (numbers and types) to be used in the different operations of the company.

Departments are likely to prove difficult when it comes to pre allocating vehicles based on utilisation criteria because of their varying needs. The allocation table that is ultimately developed must set the levels of vehicles required in agreement with everyone concerned. Vehicles to be used should be based on the standard vehicle specifications that have been developed for the fleet.

The standardised vehicles, selected for a department’s allocation table will also assist in achieving better prices during the tender process in terms of volume purchases.

In many instances allocated vehicles can be standardised for similar types of operations e.g. people movement. In other situations where specific vehicles are needed for specific jobs, a more detailed analysis based on the utilisation management process, will be required in order to develop a department’s table of allocated vehicles.

Examples of allocation reports that should be incorporated into the fleet management system are shown below.

This is an example of a simple Vehicle Allocation Table e.g. Moving People AroundDepartment

Location

Group Task Vehicle types

Approved utilisation standards

STS, Water, Waste

All areas

Workshops

Move people to work points

Sedan,

Station Wagon, 16 seater bus

LCV 4x2,

LCV 4x4,

14 500 kms every six months

Availability 85% of working days

Five year replacement point

Life cycle costs compared to benchmark set on specification sheet

Exceptions – need the formal business case by vehicle

Management reports must then be produced to control and analyse the use of these vehicles within each department. At first glance this could appear to be an information overload. However, if this is not done and

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this type of reporting system is not available, the management of the fleet in terms of right sizing and utilisation will never be cost effective.

A typical management report that should be produced every six months is shown below.

Period — Last 6 months – department

Dep

artm

ent Lo

cati

on

Gro

up

Task

Veh

. ID

/ SA

P

Veh

icle

Mod

el

Year

KM

S YT

D

Uti

lised

ab

ove/

be

low

D

ays

Ava

il.

% o

f av

ail.

STS Ndabeni Accounting

Move people to work points

500072

16 seater bus

2001 16000 10.3% 132 103%

500801

Sedan, 1998 12000 -17.3%

120 73%

500863

LCV 4x2 1995 18000 24.2% 145 89%

Purchasing

Move people to work point

... ... ... ... ... ... ...             

Hill St workshop

Spares collection

Move people to work point

             

Inspection

Move people to work point

             

 

When there are specialised jobs that are unique to a department e.g. the Fire department, another type of vehicle allocation table is required. An example is shown below.

Department Location/ Area

Group Task Vehicle types

Utilisation standards

Administration

         

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Waste           Transport management

         

Water          Health Services

         

Metro police          Parks          Community Services

         

7. MANAGING INFORMATION ON UTILISATION TO OBTAIN IMPROVED RESULTS.

A very effective strategy for getting fleet users to pay attention to fleet utilisation is to produce monthly exception reports on specific matters for each department. These reports should be publicised to ALL departments.

Peer pressure, knowledge of other department operations and the knowledge that upper management will be scrutinizing these reports, will all help to enforce the use of the management systems.

Fleet Management is an on-going process.

In order to manage utilisation, availability, specifications, vehicle selection, etc, effectively, each of these issues has to form part of the fleet management processes of the total fleet operations. This implies that there must be a comprehensive approved fleet management policy in place in all departments.

Vehicle utilisation guidelines need to be developed in conjunction with the vehicle replacement process.

Another key area in the management of utilisation is the availability of operating cost data in terms of costs per kilometre per vehicle. Without this information it is almost impossible to make the decisions related to utilisation and vehicle replacement.

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CHAPTER 16

SUPPORT MATERIAL

A USED VEHICLE APPRAISAL FORM

Vehicle Appraisal Report Original

copyOrder Number:____Number:

Dealer_____________________________________________ Client______________________________

INSTRUCTIONSFME 1. Complete this form in detail.REPRESENTATIVE 2. Sign and date as indicated. 3. Retain Copy, and give to department.

DEPARTMENT 1. Initial each entry to acknowledge only that condition existsREPRESENTATIVE

VEHICLE DESCRIPTIONYear Make Mode

lBodyType

No. of

Doors

AutomaticManu

al

Registratio

n Number

Engine

Number

Serial/

Chassis

Number

Colour

OPTIONAL EXTRAS

SPECIFY 1. _________________________ 2.________________________ 3.____________________________

4.________________________ 5. ________________________ 6.___________________________

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1GLASS

Dept.Initials

Use these symbols to describe type size and wind- location of defect screen- - - - - - Scratch Crack Chip* BreakOther glass – specify:___________________________________

Repair/Repl. Costs

R_________

R_________

TotalCost

R_________

2TYRES Indicate – Satisfactory (S) or Worn (W)

Left front _________________Right Front ___________________Left rear __________________Right rear ____________________Spare____________________ No. to be replaced _____________

Retreads___at R___

R_________

3MECHANICAL

Engine 1. Oil Leaks R________ Gearbox R_________ 2. Piston Slap R________ Differential R_________ 3. Knocks R________ Other – specify 4. Smoke R________ _________ R__________ 5. Blowback R________ _________ R_________

R_________

4BODYWORK

Specify_______________________________________________

R

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_______________________________________________

R R_________

5INTERIOR

Specify_______________________________________________

_______________________________________________

R

R R_________

6USAGE Indicate : Rural ___________ Coastal: __________

Urban: __________ Delivery: __________Total Reconditioning Costs R___________

7ROAD TEST By : _______________________

(name)____________________Overall general condition of vehicle Clean Average Poor

8KILOMETRES

Odo.Reading

TradeBook

Retail

Warranty

Negotiated Price R ____________Less Reconditioning Costs R ____________Excess Kilometres R ____________Net Price R ____________

_________________________________ ________________Authorised Signature DateDealer

OFFICE USE ONLYApproved by: _________________________ Signature

_______________ ____________________Date Title

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_________________________________ ____________________On behalf of Company DateAuthorised Driver

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EXAMPLE OF ITEMS TO BE INCLUDED IN A FLEET MANAGEMENT POLICY

1. INTRODUCTION: 2. FLEET MANAGEMENT POLICY: 3. GENERAL: 4. MANAGEMENT’S ABILITY TO CHANGE 5. FINANCING METHODS AND OPTIONS: 6. ELIGIBILITYFOR ALLOCATED VEHICLES AND POOL VEHICLES: 7. PRIVATE USE: 8. VEHICLE SELECTION: 9. REPLACEMENT POLICY: 10. USED VEHICLE MARKETING / REPLACEMENT 11. PURCHASING:12. REPAIRS, MAINTENANCE AND FUEL:13. EXPENSE MANAGEMENT:14. SAFETY PROGRAMME AND FLEET INSURANCE:15. FLEET MANAGEMENT16. OPERATIONAL PROCEDURES17. OTHER POLICY MATTERS:18. CONCLUSION:

Annexure A: Fleet procedures

1. INTRODUCTION:

This introduction should include a brief statement that positions the overall fleet in the company’s operations/ objectives – e.g. a cost efficient fleetIt should state the objectives of the overall fleet policy e.g. to ensure the effective management and cost control of the fleet – the correct allocation of vehicles to ensure the vehicles are available to support the railways operations, etc

2. FLEET MANAGEMENT POLICY:

The basic reasons for the policy - who it is aimed at - where it will be available – review dates – implementation – departmental responsibilities – drivers to sign abridged copy. The Fleet Strategy covered in terms of this policy

1. Service the needs of appropriate employees in their daily duties. 2. Operate nationwide3. Select and operate vehicles at an optimum cost.

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4. Drivers to be properly controlled and managed. 5. Vehicle costs to be split into core management areas

Fixed costs Variable costs Driver costs Vehicle overhead contribution Business general overhead contribution

6. Actual vehicle costs to be set at a certain cost percentage of total operating costs.

7. Need for vehicle operating costs to be properly departmentalised.

8. Develop an effective real time cost reporting system trends/analysis/comparisons, internal/external

9. Operate selected vehicles at a predetermined optimum cost. 10. A tracking system should be used for driver/vehicle

management and to provide specific management reports.11. Workshop management – a separate policy document to be

written12. The E Fuel management system13. Fleet right sizing14. Separate annexes must be attached for the specific needs

of the Water and Waste departments

3. GENERAL:

The basic areas of Fleet Management covered in this policy are:

Eligibility Maintenance Replacement Policy Administration Disposal Vehicle Selection Insurance Finance Private Use Expense Management Route Control and Scheduling Driver Management Purchasing Usage Fuel Utilisation

4. MANAGEMENT’S ABILITY TO CHANGE

5. FINANCING METHODS AND OPTIONS:

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Various factors will be taken into account before selecting the most cost effective method. The financial model assists in this decision making process. The following factors are to be taken into account when setting policy.

paying for usage versus ownership optimising cash flow minimising / optimising tax using inflation as a hedge maximizing profits Balance sheet considerations ROI improvement optimising the rate but keep it in perspective the use of Full Maintenance Leasing/ finance the use of residual values and guaranteed

buybacks.

Allocation of Capex Account funds to be based on replacement cycles. If capex not available, financing will be used with leasing being the normal option. Residuals will be market related less 10%. The FME will assist in selecting market related residual values.

In principle the lease period should always be aligned to the projected period of use. This reduces the need for early terminations or extensions.

These financing decisions will be made in conjunction with the Finance department using the Discount Cash Flow analysis method.

6. ELIGIBILITYFOR ALLOCATED VEHICLES AND POOL VEHICLES:

The company vehicle fulfills three main functions:-

EMPLOYEE TRANSPORT: essential to staff and job related - a perk to the executive;

A FRINGE BENEFIT: provides a status symbol - a reward for good service - part of a pay package;

COMPETITIVE NECESSITY: a negative approach, but a reality in today’s market as a means of recruiting and retaining staff.

Set your motor pool policy based on Annex A

Each department/ location must have set agreed efficiency and cost levels/budgets, in order to manage these vehicle costs to acceptable levels. Departmental heads to be totally involved at all levels when these budgets are set. Report back procedures.

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Set guidelines to ensure an adequate number of pool vehicles. The usage by the various departments to analysed. Set method to do this.

Set rules on hiring vehicles.

Annexure ‘A’ has been included with full details on the correct allocation/ use of pool vehicles, maintenance etc. This is for your consideration to be implemented in your policy.

7. PRIVATE USE:

Set an acceptable policy for private use

Use of TRACKING SYSTEM for this purpose

Set rules for use of vehicles for welfare purposes.

8. VEHICLE SELECTION:

Set the main criteria for selection based on specific job requirements. Specify the System/ methods to be used to prepare proper ‘spec sheets’ for each type of operation/ vehicle. See the Right Sizing report

Technical specification – job related Reliability Fuel consumption - about 40% of costs Maintenance - about 15% of costs Depreciation (i.e. project difference between new price and

eventual selling price. This represents at least 30 - 35% of costs.)

Dealer support Other items such as interest, insurance's and other costs Projected use and location

Commercial vehicles selected on following technical specifications and the actual job to be done by the vehicle. The selector criteria must be reviewed annually.

Use the FMIS management costing system to calculate the projected TOTAL LIFE TIME COSTS for vehicles. Operating cost standards and specification sheets will be developed for each vehicle/ operation.

1. Vehicles should be specified based on the actual routes, loads and collection points

2. This means that route cost analysis must be developed for comparative purposes.

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3. All routes and vehicle use should be determined. This will help with deciding on the best routes related to loads, collection points and vehicles specs.

4. Vehicle specs/routes must be recorded for future use and for comparisons against actual use and related costs.

5. The use of diesel rather than petrol engined vehicles6. Air conditioning should be fitted to all vehicles – drivers are an

important asset

9. REPLACEMENT POLICY

Set the replacement policies. This is best done by introducing the formal replacement modeling system. The replacement policy for each level of vehicle must be stipulated.

10. USED VEHICLE MARKETING / REPLACEMENT

Set disposal methods and procedures as recommended Replacement planning to be done at least once a year. One year in advance of requirements. Set out procedures

11. PURCHASING:

Set policies based on report and internal procedures

12. REPAIRS, MAINTENANCE AND FUEL:

E Fuel system to provide information reports on individual vehicles

Set rules to manage the cost of maintenance through dealers and workshops. Use of maintenance management facility to control your maintenance and repair costs.

Parts and labour discounts to be negotiated with the supplying dealers. Costs in terms of costs/ kilometres to be analyzed on a regular basis with industry norms and your own pre-determined operating costs standards.

Extended warranty programmes.

13. EXPENSE MANAGEMENT:

Management decisions and policies will be evaluated through the FMIS control systems. Each of the areas of Fleet Management listed on the first page of this document will to be reviewed on a quarterly basis.

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Management decisions and polices will be evaluated through statistics taken from the FMIS control systems. The control system will produce costs based on the following aspects in costs/ kilometres and rands.

VARIABLE COSTS:

FuelMaintenanceRepairsTyres

FIXED COSTS:

Depreciation (Purchase price minus Resale price)Interest – your costs of funds/ loss of interestLicensesInsuranceApplicable overhead costs

Fixed costs will be managed on a similar basis. A vehicle asset register will be maintained with the following information.

purchase price monthly projected depreciation (actual ‘charge’ per month) projected resale value projected replacement date monthly insurance cost accidents costs final resale price actual cost per month in Rands. i.e. recalculate depreciation

change projected p/kms actual p/kms

14. SAFETY PROGRAMME AND FLEET INSURANCE:

Set rules for risk management and a proper control programme of inducements and penalties.

Set rules for accident reporting system Set up Accident Committee. Set rules for drivers if involved in accidents.Driver training and testingSet up accident recording system. A management report to be produced on a quarterly basis showing the following information:

Number of fleet vehicles

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Total kilometers driven Kilometers per vehicle Total accidents reported Total preventable accidents Total non-preventable accidents Personal injuries Fatalities Total costs Average cost per accident Ratios for total accidents related to fleet Rations for preventable accidents related to fleet Ratios for non-preventable accidents related to fleet.

Specific targets must be set in terms of these statistics.

15. FLEET MANAGEMENT

A properly accredited Fleet Management Committee to be formed in the FME with clear responsibilities and authorities. Set rules for budget processes and reviews. Also rules for departmental budgets and reviews.Decide on the rules for determining AVAILABILITY and UTILISATION standards.

To help Fleet Administration, set responsibilities and authorities at FME and departmental level. A list is given below.

The main authority and source for analysis and recommendations on fleet management operations The only manager able to authorise an order for vehicle

purchases The only manager able to authorise major mechanical repairs

and major collision damage repairs If vehicles are financed, the sole company contact and final

authority on money spent The final authority on the sale of used vehicles, whoever the

buyer The primary management source concerning fleet management

recommendations. Provide the necessary training to the departments on fleet

management and administration.

The duties of the managers/ staff in the FME should be clearly documented within the company’s HR policy. A list of some of the core fleet administrative duties are given below –

INSURANCE –Accident and windscreen claimsProcess - from accident to repaired vehicle

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Payment of panel beaters

VEHICLE REGISTER Updating motor vehicle list with:New vehicle detailsVehicle/ driver allocations

Monthly Fleet Management REPORTSCompiling statistics and trends

VEHICLE SERVICES Queries relating to vehicle mechanical problemsScheduling services and maintenance

PURCHASING of company vehiclesChecking documentation Placing ordersBank Liaison

SELLING of company vehiclesChecking documentation Obtaining quotes Acquiring money from dealers

LICENSES – Renewal of company vehicle/trailer licensesRoad worthy, etc. certificates

FINESInforming traffic department of driver details in writingUpdating fine scheduleQueries

FUEL CARDS. Ordering and canceling all fuel cards

DRIVERSAllocation, management, crews

Monthly FUEL REPORTS Analysis of management reportsQueries with departments and drivers.

EXCEPTION Reports - Vehicle fuel/service etc Various exception reports to be printed monthly - sent to mangers for investigations and feed back to fleet admin. Follow up outstanding feedback.

INSURANCE/ ACCIDENTS

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Overall management

16. OPERATIONAL PROCEDURES

Review your draft policy and decide what to incorporate into the new policy.

Annexure A provides extensive guidelines that should be implemented in order to control the use of pool vehicles, maintenance, repairs, allocation of vehicles, etc.

17. OTHER POLICY MATTERS:

A number of other policy matters should normally be included in a policy document / drivers manual. These are listed below as reminders:

Driver to take due care of his vehicle, i.e. driving, maintenance, cleaning, garaging, etc.

Vehicles not be used in competitive situations Proper garaging overnight Fitting of immobilizers and alarms in terms of fleet insurance

programme Accessory fitting - if fitted, become part of the leased vehicle or

can be removed and the vehicle “made good”. If a vehicle is damaged, the driver pays. Can be purchased on a separate invoice by the employee

Stolen radios - do you keep replacing, or does the driver replace after the second time?

Tow bars - approval required Who else is allowed to drive the vehicle? Driver responsibilities - depending on the final policy, must be

clearly spelt out and given to your drivers. A “Drivers Declaration” should be signed by all staff member who have been allocated a company vehicle, including those entitled to an allowance

Accident procedures - define them including instructions about vehicles being towed from accidents

Method of tax deductions Traffic offenses - payment of fines Any internal administrative procedures A vehicle committee should be nominated to manage all vehicle

policies and related personnel issues

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Annexure A: Fleet procedures

VEHICLE REPAIRS AND CORRECTIVE MAINTENANCE REPORTING

1. Driver complete daily vehicle check list

2. Problems Yes 2.1 Report to immediate supervisor

2.2 Supervisor investigate matter of defect

2.3 Supervisor will decide if vehicle needs repair

No 2.4 Carry on with daily tasks

3. Supervisor will decide if vehicle needs workshop attention:

Yes 3.1 Note defects on daily checklist remarks space

3.2 Send driver with vehicle and daily check list to dealer

3.3 Driver report to dealer with daily check list/ repair order

3.4 Dealer contacts FME for authorisation

3.5 Superintendent does downtime estimate

No 3.6 Note minor defects on daily checklist. Driver carries on with daily tasks.

4. More than two hours less than two days:

4.1 Driver waits at dealer depending on time to repair

4.2 Dealer advises driver’s Supervisor to collect driver or issue driver with pool vehicle, if available

4.3 Driver Supervisor to plan drivers task if no pool vehicle is available

5. Two days and more:

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5.1 Issue driver with pool vehicle, if no pool vehicle is available the FME will hire a vehicle

5.2 On completion of repairs, dealer informs the driver’s Supervisor and notes date and time of notification

Note: Supervisors must complete daily vehicle checklists at the end of the month and send them to the FME. Minor defects which were not repaired during the month will be noted. The checklists will be signed by the FME and returned to the Supervisors for safe keeping for 12 months.

VEHICLE PLANNED MAINTENANCE

1. Call ups for vehicles for planned maintenance:

1.1 A monthly maintenance schedule report will be created by FME

1.2 Superintendent checks and controls reports

1.3 FME dispatches call up slips. Fourteen days prior to service to Supervisors

1.4 The driver is sent to the dealer with the service/ repair order

1.5 If additional work is required, the dealer will obtain authorisation from the FME

2. If the service will take two days and more:

Yes 2.1 FME will provide a pool vehicle

2.2 On completion of service, dealer informs the driver’s Supervisor and notes date and time of

notification

No 2.3 No pool vehicles available, Supervisor must plan driver’s daily tasks

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HANDLING OR EMERGENCY BREAKDOWNS AND REPAIRS DURING WORKING HOURS:

1. FME informed about situation of breakdown and type of repairs required

2. FME identifies approved place of repairs and obtains quotation

3. FME obtains PO and inform s driver of place of repair

4. FME arranges for repairs to be done

HANDLING OF EMERGENCY BREAKDOWNS AND REPAIRS AFTER HOURS:

1. Supervisor identifies available place of repairs or supplier

2. Supervisor arranges with Dealer and driver to have repairs done

3. On the first working day after breakdown or emergency repairs, the Supervisor must inform FME of the action taken.

BOOKING AND USE OF POOL VEHICLES:

1. Pool vehicles must be booked at least 4 working hours in advance

2. Bookings may only be done through the Pool manager.

3. The keys, Fuel card and logbook must be collected on the day and time when the vehicle is going to be used from the pool vehicle clerk’s office. Vehicles required for departure before normal working hours must be signed for the previous afternoon and keys, card and logbook to be handed in at the main entrance security. On the day and time of departure collect keys at security

4. The official and the vehicle clerk must inspect the vehicle for damages and completeness prior to signing for the vehicle

5. Officials using pool vehicles must sign for vehicles and tools with it

6. When returning the vehicle, the clerk will inspect it. Any loss of tools, such as spare wheel, jacks, wheel spanners, fire extinguishers, etc., and damages to the vehicle during utilisation must be reported to the vehicle clerk when returning the vehicle

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and logbook. If not reported, the matter will be investigated and damages will be determined

7. When returning the pool vehicle, the logbook must be competed according to the approved procedures and returned with the keys to the vehicle clerk at the service hatch. Information based on the utilisation will be reported back to the Departmental Heads

8. Pool vehicles must be returned preferably before 15:45 pm unless proper arrangement are made

9. All pool vehicles returning after hours or late may under no circumstance be taken home. Keys and completed logbooks to be handed in at the security and signed in the book on late arrivals

UTILISATION OF VEHICLE DURING STANDBY DUTIES:

1. Allocated vehicles may only be used after hours with the company’s approval for standby duties for that specific department or emergency work or pre arranged overtime work

2. No vehicles may be used for private purposes during standby duties. Social functions and sport meeting are seen as private functions

3. When a person is on standby, and he leaves his residential premises for whatever reason other than a call-out, he must use his own private transport

4. No family members or other private persons may, at any time, travel in an allocated vehicle

5. When working organised overtime during weekends or public holidays, it will not be regarded as standby

6. Persons working organised overtime may not use allocated vehicles to go home with, unless permission is granted by the Departmental Head

7. When working organised overtime and on normal working days, persons must use their private transport to and from the workplace

UTILISATION OF ALLOCATED VEHICLES:

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1. It is the responsibility of the driver of an allocated vehicle to care for it after that vehicle has been issued to him

2. It is the responsibility of the Supervisor to control the movements of the vehicle and assist the FME controlling vehicles

3. Vehicle inspection must be done before commencement of official duties

4. The driver must see that the legal licensing disc, operator card and certificate of fitness is displayed on the vehicle

5. The logbook must be completed every day by the driver, checked by the Supervisor at the end of the week and sent to the Fleet Department

6. No private work will be done with allocated vehicles. Vehicles may only be used for official duties and standby duties

7. Vehicles may only be used to go home when on standby or otherwise authorised

8. No private persons will be transported in official vehicles (e.g. persons not employed by the company)

9. Where a vehicle is fitted with transmission lock it is the driver’s responsibility to see that he is aware of the lock, understands the working and that he uses it when parking the vehicle

10. Log sheets shall be completed as required. Log sheets shall record all vehicle movements as per the following activities:

Operational time;Idle time; andMechanical down time

11. Department Heads shall undertake random spot checks on the maintenance of log sheet and the physical use of mobile assets

12. Head of Departments shall monitor driver training with regard to vehicle utilisation

GUIDELINES FOR ALLOCATING APPROPRIATE TRANSPORT REQUIREMENTS:

1. Head of Department:

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1.1 Investigate transport requirements at creation of post

1.2 Identify transport bearing duties

1.3 Determine average kilometer and time per duty

1.4 Calculate estimated total kilometer and time utilised per month

1.5 Submit application for transport to Fleet Management for comments

2. FLEET MAMAGEMENT

2.1 Is time utilised >/= 60% of time that Pool Vehicle is available?

Yes 2.1.1 Allocation permanent vehicle

No 2.1.2 Share in Pool vehicle system

2.1.3 Inform Head of Department

AUTHORISATION OF DRIVERS TO DRIVE OFFICIAL VEHICLES:

Do officials require a pool vehicle or a permanent allocated vehicle?

1. Pool Vehicle:

1.1 Head of Department identify officials using pool vehicles

1.2 Only officials with legal driver’s licenses will be allowed to drive pool vehicles

1.3 Officials to be evaluated at an authorised vehicle training center

1.4 Official to have a license that will indicate what category of vehicle he/she is allowed to drive

1.5 Pool vehicles will be issued according to prescribed procedures

ISSUING OF OFFICIAL VEHICLES:

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1. Only officials with ID cards indicating what category of vehicle he is allowed to drive will be issued to him

2. The Supervisor together with the driver will inspect the vehicle for any damages and losses

3. The driver will then sign for the vehicle and all the accessories

4. When a driver resigns, the vehicle must be returned and inspected

5. Any shortcomings or damages will be recorded and forwarded to the department for payment.

6. Replacement vehicles will be inspected when due for replacement

7. Short comings and damages will be recorded and forwarded to the Supervisor for action

237Company/ organisation

Fleet Management Department

Workshops Departments

Functional Management

Vehicle Acquisition Daily operations Pool

Hire

Workshop Cost Management

Selection FinancePurchasing1. Fuel2. Tracking3. Maintenance4. License / fines5. Drivers Dement plans Day to day functions Training

Used Vehicle MarketingReplacement Cycles

Residual ValuesAuctions

LiaisonRequirementsBudgets

Safety ProgrammeInsurance

DriversAccidents

Accident Committee

Director level Budgets, FM Programmes, Policies, Costs, Review Committee, Procedures

- Based on centralised management

Decentralised user Management

Vehicle specsTCOOperationalrequirements

PricingDealersDelivery

VehiclesAllocationTracking

ControlSystems

OperationalRequirement

Fleet Management systemCost Analysis

BudgetSAP Liaison

Distribution ofReportsReview

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MICHAEL H. CRANKSHAW

Mike Crankshaw started his working life in the Rhodesian Army. He spent ten years in the regular army and served in Malaya for two years on active service. He left the army with the rank of a Major.

His next ten years were spent with NCR, the computer company. He was trained as a systems analyst and programmer. He then moved onto selling main-frame computers in Rhodesia and South Africa.

He joined UAL Leasing and was trained in all aspects of asset financing by US Leasing, one of the biggest leasing companies in the world.

In 1975, PHH of the US and Nedfin Bank formed a joint venture company and launched the first fleet management company. Mike was appointed as the managing director and after five years had built the company up to the point where it was managing nearly 25 000 vehicles.

He then moved to Stannic, which was part of the Standard Bank. He was tasked to launch the bank’s fleet card fleet management system and subsequently their full maintenance leasing company. Mike stayed with bank in various fleet financing and fleet management positions for some nine years and finally moved on, having reached the position of Assistant General Manager.

In 1988 he formed his own fleet management consulting company. Today it is named FleetCUBE. The company consults at all levels in the fleet and motor industry from high level strategic planning with manufacturers to dealer marketing/training.

Mike maintains close links with the USA market and certain fleet management companies.

Mike has developed the company to be very IT and internet oriented in providing services to the fleet management industry. The most important system available from the company is the very comprehensive online fleet management information system called FleetCUBE Online

His business qualifications are –

Management Development Programme at University of Cape Town.

Damelin Management School - Diploma - Business Management Member of South African Institute of Management Member of South African Guild of Motoring Journalists

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His recreational activities - Mike has been very involved in traditional martial arts for the last twenty six years. He holds a 5th Dan Black Belt in karate and traditional Okinawan martial arts.

Mike Crankshaw has written this book as a contribution to the business discipline of fleet management because books of this type are not readily available. Mike has drawn on his considerable fleet management expertise gained over some thirty years in the industry.