Editor’s Note: Perhaps more so than any other fleet sector, government fleets face a difficult challenge when it comes to budgeting. The reason is that they’re funded largely by tax revenues, and politicians who want to be re-elected are reluctant to raise taxes, even as fleet costs rise. In addition, a number of states may see declining tax revenues as a result of the new federal tax law, which has placed a lower limit on the deductibility of state and local taxes.
Our first contributor to our new column for government fleet managers, Steve Saltzgiver, is a distinguished and seasoned fleet professional, member of the Government Fleet Hall of Fame, and a Government Fleet Legendary Achievement Award recipient with experience managing a city fleet, two state fleets and two Fortune 500 fleets. He is also member of the NAFA board of directors and is a former director of the National Council of State Fleet Administrators. — Mark Boada
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By Steve Saltzgiver, BSBM, MAOM, CAFS, Fleet Management Consultant, Mercury Associates
The two best ways for a fleet to reduce its costs are to implement a sound replacement program and a departmental charge-back process. A well-designed and managed vehicle replacement program avoids the common problem of holding a vehicle so long that maintenance and repair costs make its total cost of ownership higher than that of a new vehicle.
On the other hand, experience shows that a charge-back program holds down operating costs by making the departments that operate the vehicles financially accountable. Faced with responsibility for bearing the expenses, management seeks ways to lower vehicle operating costs in a number of ways, including more closely following routine maintenance schedules, tighter management of repairs, controlling fuel costs and limiting personal use of vehicles.
PRINCIPLES OF ASSET AND FLEET REPLACEMENT
As North America’s largest dedicated fleet management consultancy firm, Mercury Associates works with hundreds of clients to assist them with the design of an effective long-term asset replacement program. As such, we have found that a well-designed long term replacement program has five key components:
- Asset replacement cycle guidelines, empirically validated where practicable using the organization’s own historical asset cost data, that indicate when specific types of assets generally should be replaced so as to minimize their total cost of ownership (TCO).
- A long-term fleet replacement plan that pinpoints future replacement dates and costs of individual assets based on the application of recommended replacement cycles, allowing for the determination of future year-by-year fleet replacement costs and variations therein.
- A capital financing method that facilitates securing sufficient funds each year to acquire replacement assets in accordance with the replacement plan.
- A short-term replacement prioritization and earmarking process for selecting the specific assets and pieces of equipment to be replaced in the coming fiscal year.
- A budgeting and funding process that enables fleet user organizations to consistently secure the necessary funds to execute its replacement plan.
CHARGE-BACK RATES
Well-designed cost charge-back systems make the costs of both providing and consuming fleet resources and services transparent. Cost transparency creates accountability (i.e., driver and department officials and executives) which, in Mercury’s experience, is essential for driving continuous improvement in fleet management and operating practices.
Charge-back rate development involves identifying all of the direct and indirect costs associated with furnishing a distinct goods or service (i.e., fleet replacement planning, motor pool rates, parts and fuel markups, and overhead rates.) and computing an amount that will recover these expenses when multiplied by the number of units of such goods or service – such as the number of assets managed – consumed by fleet users. A cost charge-back system and properly designed charge-back rates offer an entity a number of important benefits.
First and foremost, using a charge-back system makes for better management and allocation of resources than would be possible if all expenses were borne solely by the Fleet – which would then furnish fleet-related goods and services free of charge to departments and divisions. Using a charge-back system involves, in essence, selling goods and services rather than giving them away.
It is a well-established fact that organizations who are required to pay for the resources they consume are then more motivated to manage such consumption than are those that receive such resources for free. We are all consumers by nature and as such make the important decisions based on total costs. For instance, a department that must pay for repairs to its vehicles is more likely to appreciate the benefits of a good preventive maintenance program and a sound fleet replacement program than is one that receives preventive maintenance and repair services for free.
In addition, being required to pay for fleet resources makes fleet users much more attentive to the quality and costs of such resources, which motivates them, in turn, to hold the provider of the resources – such as Fleet Services – accountable for its performance. Such accountability promotes the cost-effective provision of fleet-related goods and services. It also provides a basis for benchmarking the cost of an activity against commercial providers of similar services (i.e., garage labor rate) and peer organizations.
A typical and generally accepted best management practice in the industry is the development and use of a service based charge-back rate model. This type of model would include the following:
In-House Maintenance and Repair (M&R) Labor Rate. This is the activity in which the technicians engage. The rate for recovering these costs is an hourly labor charge for time spent by technicians working on specific vehicles. This hourly rate is multiplied by the actual number of hours charged by mechanics to each maintenance and repair work order to arrive at the total labor charges associated with performing the services documented on the work order.
In-House Parts Management Markup. This activity centers on the procurement and supply of parts used by maintenance technicians to perform vehicle maintenance and repair work in garages. This includes activities associated with the establishment and administration of parts contracts and blanket purchase orders; the purchase of parts on an ad hoc basis; part ordering, pickup, and delivery; over-the-counter parts disbursement; inventory management and control; and/or the cost of an on-site parts service provider.
Sublet (Vendor) Repair Management. This activity centers on the procurement of vehicle maintenance and repair services from external service providers such as commercial repair shops. It includes the establishment and administration of service contracts and blanket purchase orders; the purchase of services on an ad hoc basis; and the management and administration of service transactions.
Fuel Management and Rates. This activity involves the provision of vehicle fuel via fleet-owned and operated bulk fueling facilities or via a fuel credit card program.
Short-Term (Motor Pool) Vehicle Rental. This activity involves managing and operating a Motor Pool which provides vehicles to employees on a short-term rental basis.
Asset Management and Administration. This is a set of activities associated with managing the acquisition, commissioning (e.g., licensing and titling), replacement, decommissioning, and disposal of vehicles included in the fleet. The principal cost of providing these services is the salaries and fringe benefits of Fleet employees engaged in such activities.
Lastly, additional rates such as excessive vehicle use, misuse and abuse of equipment are other examples of where charge-back rates can be developed to drive better organizational accountability. Improved cost awareness and accountability lowers the overall costs of fleet management.
