Fleet Wellness aims to improve the health of your vehicle fleet and save money.
This is the third of five key pieces that explain Fleet Wellness. We have covered the first two Fleet Wellness tenets: Strategy and Measurement. The third is Total Cost Management, a much more holistic and inclusive look at fleet costs than is common in automobile analysis. It’s lifecycle costs and a lot more.
Organizations with vehicle fleets often focus on one aspect of cost – acquisition cost. Looking primarily at acquisition cost often leads to imprecise analysis. When looking at the cost of your fleet, look beyond acquisition cost to get a complete picture.
Total cost management looks not only at the typical items important to stakeholders – acquisition costs, maintenance costs, fuel efficiency – but other critical factors that include administrative time, financing, reliability, opportunity costs, and resale value. This is the essence of total cost management.
Total Cost Management for your fleet includes vehicle lifecycle costs and many other factors. Vehicle lifecycle cost looks at three factors of cost: acquisition cost, disposition value, and cost to operate.
Lifecycle Costs – Understanding Cost Drivers
Start with the end in sight.
Think of your purchases this way: buy what the ultimate used car buyer for your fleet will want to buy. Appeal to the masses. This impacts vehicle selection, color, options, and ultimately the mileage and timing for sale. Buy for your needs but also buy to sell!
Buy vehicles at the ideal time and lowest price and leverage fleet discounts. Be wary of buying options, accessories, or warranties as additional features can cost quite a bit and have little resale value. The wrong color can notably decrease value at disposition.
Maximize value at the time of disposition by timing used vehicle sales at optimal times of the year and by routinely balancing fleet vehicles for age and mileage.
Example of Disposition Value:
If the new model year vehicle costs $1,000 more than the prior model year vehicle, the conclusion when buying the prior model year vehicle would appear to save the company $1,000.
However, when factoring in the resale value, you get a very different answer. In four years with 80,000 miles, the newer model year vehicle is worth $2,500 more. It is perceived to be a full year newer and therefore loses only four years of value, not the five like the “special close out”.
When the unit is sold, the company nets $1,500 savings ($2,500 from resale less $1,000 premium paid up front) with the newer model year vehicle. The math tells the truth.
That’s a savings of $41 per month – per vehicle. That’s extremely meaningful to fleets of 10 – 50 – 100 – 500 vehicles.
The best answer is found by looking at all the relevant factors. Fleets typically focus on acquisition cost only. By expanding to two factors, acquisition cost and resale value, the decision is drastically different.
Cost to Operate
Consider looking at the following factors and making decisions with all cost drivers and administrative and financial data at hand:
- Annual maintenance costs
- Annual mileage
- Annual fuel expense
- Mileage per year
- Administrative time spent and total administrative cost
- Safety technicians
- Insurance cost
- Fleet financing and cash flow
Looking at all factors of the total cost management for fleets, organizations will make mindful fleet decisions with respect to the full financial implications. Consider administrative time spent managing the fleet, opportunity costs of capital tied up in assets, overhead costs, equipment downtime as well as the opportunity cost of time.
To learn more about how you can use the Fleet Wellness program to assess, track, and measure the health of your fleet and your progress toward your strategic goals, download our eBook.