By Steve Saltzgiver, Director – Mercury Associates Inc.
The year 2020 will undoubtedly be one of the most memorable years in all human history, with the economies of more than 180 countries being shut down for months as the world combats the novel coronavirus (COVID-19).
Ironically, COVID-19 emerged during one of the longest economic recoveries ever seen. When the pandemic hit, many fleets were busily engaged in replacing their vehicles and expanding their vehicle count to handle the economic boom. Then they suddenly found themselves going from full-employment to millions of people unemployed and vast numbers of equipment being moth-balled as the world’s economy plunged into recession.
Obviously, this recession is something of an historic anomaly, and no one has all the answers to where fleets should go next to recover from this major financial setback. However, while the debate is raging among the economists as to whether the recovery will be “U-shaped”, “V-shaped” or some other-shaped curve, one thing is certain: the remainder of 2020 and possibly the next few years will be severely impacted. No one really knows the extent of the impact, but if past recessions are an indicator, we should expect to see fleet budgets slashed, equipment lifecycles extended, staff sizes decreased, and salaries reduced in the short term to overcome the financial downturn.
Cuts in further cost-cutting investments
This COVID-19 glitch will especially impact the government fleet sector as it struggles to balance budgets after the loss of tax revenue and unbudgeted funds being spent to mitigate the impact of the virus on public health. Unfortunately, many governmental jurisdictions did not take full advantage of economic good times to repair the damage to their fleet replacement programs caused by previous downturns in the economy. Further, many invested in new information technology solutions but neglected to invest in developing the employee skills needed to utilize that technology to improve their business practices.
To exacerbate these problems, many fleets explored vehicle electrification and other fleet greening strategies but missed the opportunity to leverage enthusiasm for sustainability improvement to obtain support for other investments in their fleets. Because of these green strategy initiatives, many fleets spent capital on sustainability and overlooked the timely replacement of their other assets. In reality, replacing assets in a timely fashion is one of the most sustainable improvements a fleet can invest by leveraging new technology for improved emissions and fuel economy.
A “Perfect Storm” for fleets
Finally, many fleet organizations did not develop strategies or plans for dealing with the “Perfect Storm” that is still bearing down on fleet owners around the world. For the past several years, Mercury Associate’s president, Paul Lauria, has been sounding the alarm to fleet managers to begin recognizing and addressing the looming effect of the “Perfect Storm,” which is the convergence of advanced technology, automotive complexity and loss of institutional knowledge resulting from:
• Changes in automotive technology,
• Changes in information technology, and
• Changes in workforce demographics and culture, tenure, and human capital.
Amid these changes in the fleet sector, several forces have been adding to the challenge to maintain adequate resources and budget dollars. One such factor is the significant aging of workforces in several industries that rely heavily on vehicles and equipment.
As an example, the percentage of employees over the age of 45 years is as follows:
• 51 percent in the utility industry;
• 54 percent in the trucking industry;
• 63 percent in the bus transit industry;
• 63 percent in “general government” (excluding law enforcement/public safety).
This aging workforce and the increasing pace of employee retirements, coupled with the increasing technological complexity of vehicles and equipment, foreshadow growing pressure on fleet management – especially relating to maintenance and repair programs.
At the other end of the spectrum, almost one-third of fleet professionals in the United States are experiencing their first-ever recession amid record years of economic growth and prosperity. Adding insult to injury to this “Perfect Storm”, the average job tenure of Baby Boom generation workers is seven years compared to the current Millennial generation workers averaging two-year tenures. This recession could present many unforeseen cultural challenges for these Millennial workers and management as the job market begins to slow down their opportunities for job-hopping reduce and the employment mobility, they’ve become accustomed to subsides.
The COVID-19 recession is different
Unlike past recessions, the COVID-19 shutdown resulted in thousands of fleet vehicles and equipment sitting parked while employees were either furloughed or forced to work from home. As fleet managers know, when fleet vehicles sit parked for extended periods of time the second law of thermodynamics begins to kick in and equipment starts to degrade.
For example, engine oils sink to the lowest parts of the crankcase, oil quality degrades, rubber components like hoses, tires and belts begin to dry and crack, seals begin to desiccate and leak, batteries corrode, degrade and lose charge, body and frame parts begin to rust and oxidize. This wear and tear from equipment sitting idle can be significant if fleet caretakers have not invested the time to periodically start up and run the equipment.
Moreover, the COVID-19 shutdown has permanently changed the way fleet managers must clean and care for equipment. Disinfecting equipment in the future will increase both expenditures and the resources required to perform these new procedures. For example, costs to disinfect a vehicle to ensure driver safety is estimated to range between $50 to $200 depending on whether provided inhouse or outsourced to a third-party.
This new cleaning regimen in fleet management sanitizing procedures comes amid the increasing brain drain the industry is already experiencing, with Baby Boomer retirements taking institutional knowledge away from the workplace. Coupled with the new cleaning procedures is the additional cost of acquiring personal protective equipment (PPE) to perform these duties. Adding another set of tasks to meet driver demand for more hygienic equipment challenges fleet management to ensure vehicle downtime is minimized.
Need to increase fleet size?
The increasing pressure to provide sanitized equipment may ultimately increase the likelihood of fleets having to increase fleet sizes to maintain adequate spare levels to serve their customers. However, the verdict is still out as to whether an overall decline in vehicle usage may offset this new phenomenon.
Many experts agree that the COVID-19 phenomenon is just another factor accelerating the Perfect Storm that has been bearing down on the fleet industry for the past decade. The convergence of the loss of institutional knowledge with the increase in equipment technology and complexity continues to accelerate exponentially and adds to the myriad of issues fleets already have to cope with.
Mercury Associates has been helping many of its clients plug the brain-drain gap for the past decade by temporarily managing fleets while organizations search for qualified candidates to replace experienced employees exiting the industry. While serving as temporary fleet manager replacements during this “Perfect Storm” crisis, consultants are called upon by fleet organizations to provide expert mentoring services to educate and train a new generation of fleet management professionals.
Another clear gap emerging during the Perfect Storm and accelerated by the COVID-19 pandemic is the necessity for organizations to create, establish, update, and codify their policies, procedures, and work instructions. With the exiting of the Boomers, many fleet organizations have found themselves flat-footed as they struggle to train a new generation of fleet employees to maintain quality and productivity.
Where budget cuts will hit
The responsibility for the operation and management of increasingly complex fleet assets and technology-enabled fleet management processes is being entrusted to an evolving workforce which may or may not be able to weather the Perfect Storm. Ideally, fleet owners would be spending time thinking about the implications of these challenges and developing plans for meeting them, but this requires a degree of strategic focus that is difficult to achieve due to the day-to-day pressures of managing and maintaining a fleet, and especially during a recession.
Factors often overlooked during a financial downturn are the impact on the new vehicle market, where buyers traditionally acquire fewer units because of slashed budgets and associated residual values which can be impacted. Finally, municipal fleets operating under an Internal Service Fund may experience losses as vehicle utilization rates decline, which inevitably will affect future user rates to recover costs. On the other hand, vehicles and equipment with lower use, coupled with technology changes, will require less preventive maintenance, resulting in reduced downtime and replacement of traditional wear-and-tear components.
Unfortunately, experience shows that decision-makers not only are not inclined to think much beyond the next fiscal year or two, but they may make unwise short-term decisions that will exacerbate these long-term challenges. Previous economic downturns may be a good predictor of what’s to come in the near-term as fleet management deals with the COVID-19 pandemic and its impact. As an example, a recent survey found 80 percent of respondents expect a decrease in their budget in the next fiscal year, 78 percent expecting operating budget cuts and 81 percent expecting capital budget cuts.
Budget cuts include:
• Eliminating business travel (64%)
• Delaying vehicle purchases (32%)
• Cutting back on training (29%)
• Cutting back on hiring (26%)
• Cutting back on shifts (23%).
Longer-term directives likely will include:
• Right-sizing (i.e., downsizing) the fleet and right-type (right-size asset for each application)
• Reducing (excessive) replacement reserve fund balances.
• Investigating outsourcing and leasing/financing opportunities to leverage finite capital.
• Curtailing take-home use of vehicles.
Cost-cutting strategies to consider now
During past recessions, fleet managers have been tasked by executive management to do more with less, which can generate many opportunities to think outside the box and become more creative. Some of the strategies fleet managers should be considering offsetting the financial impacts of the COVID-19 challenges may include one or all of the 15 following strategies:
1. Reduce asset age by changing from purchasing vehicles and equipment to debt financing and/or leasing to reduce capital and operating expenditures. Mercury fleet studies have shown significant cashflow savings in the millions annually by more efficiently managing reserve fund financial resources and maintaining a younger, more modern fleet.
2. Readjust customer charge-back rates to strengthen user accountability. Budget cuts often prompt fleet-user agencies to question why they can’t outsource the maintenance and repair (M&R) of their vehicles to “save money.” Such questions are usually triggered by the belief that in-house M&R charges are excessive. While that may be true, cost charge-back rates may not be a good gauge of cost-saving opportunities because rates are normally calculated recover some unavoidable costs, like overhead expenses. Making all costs transparent and visible to management and users allows wise and informed decision-making.
3. Continue to closely monitor inhouse technician productivity, using routine metrics such as vehicle equivalent unit analysis, to optimize staff size, shop space and parts inventory levels. Hold technicians accountable to standard (70-75%) direct labor (wrench-turning) goals, and audit individual work order productivity using industry standard repair times to hold each technician accountable to productivity standards. Routinely conduct quality-control inspections of each technician’s work. Re-evaluate all indirect labor to determine if a lesser-skilled employee can perform perfunctory activities for lower salary expenses.
4. Assess the current fleet size and proactively right-size it, where practical, to identify and dispose of low- and under-utilized assets, and use the remarketing proceeds to bolster the fleets’ reserve fund balance dedicated to the replacement of assets. Although this is a popular cost cutting strategy among decision makers who do not understand fleet costs, it should be approached carefully.
Even if a significant number of assets can be removed from the fleet, immediate cost savings tend to be small, as the proceeds are typically from the sale of old vehicles and equipment with little market value. The magnitude of potential savings, or of future cost avoidance, depends on how well asset allocation and utilization have been managed in the past.
The objective is difficult to accomplish when a fleet is aging and/or replacement spending levels are being cut. Nevertheless, it should be approached cautiously by fleet management organizations that have worked hard to establish collaborative relationships with customers.
5. Assess the impact on the post-COVID-19 projected expenditures required for additional cleaning and sanitization procedures along with increased downtime and potential fleet spares for these changes in service patterns.
6. Proactively audit and review reserve fund balances to ensure they are adequate and not too excessive. Many fleets tend to maintain excessive balances in their fleet reserve funds that may be better served to acquire other organizational assets (e.g., facility and infrastructure improvement, update computer software and hardware equipment, etc.). Plus, executives tend to raid and/or re-appropriate reserve funds to the detriment of fleet replacement during economic downturns, especially if the fund balances are too high and not well-managed by fleet.
7. Revisit the fleet management roadmap for the next five to 10 years to ensure the organization has an adequate strategic plan for addressing the concerns associated with the economic downturn and to systematically eliminate unnecessary waste through process improvement initiatives.
8. Revisit the organizational fleet policies and procedures and employee work instructions (i.e., employee job descriptions, desktop instructions, etc.) and ensure future contingency plans are created to properly account for and handle pandemics and other unforeseen disasters.
9. Audit and renegotiate outsourcing contract fees for large-dollar volume vendors. These contracts may include fleet management company fees for asset disposal, telematics expenditures, fleet management information system annual costs, dealer purchase and fuel markups.
10. Assess and leverage the use of cooperative purchase agreements where practical to leverage economies of scale and reduce resources required to prepare requests for proposal and bids. (e.g., NCPA, Sourcewell, etc.)
11. Analyze the fuel datasets for user compliance and identify opportunities to eliminate waste and fraud (i.e., theft, incorrect fuel products, etc.) that may be taking place throughout the fleet among users. Similarly, look for opportunities to save on fuel costs associated with unnecessary or excessive idling.
12. Eliminate unused or slow-moving parts inventory and negotiate a contract with your parts provider to provide just-in-time parts in order to avoid excessive stock and carrying costs. Try to negotiate consignment supply, but, at minimum, ensure that the contract includes buy-back for unused parts.
13. Audit vendor invoices routinely with labor calculator software tools to save significant expenses and strengthen relationships. Hold vendor partners accountable to standard repair times just as you would with in-house technicians. Negotiate reduced labor and parts discounts and remedial actions for noncompliance. Strengthen these vendor relationships by establishing service level agreements to increase bilateral accountability.
14. Audit both take-home vehicles and the mileage reimbursements for the use of personally owned vehicles to determine if these options are effectively managed or if other transportation alternatives (e.g., public transportation, rideshare, pooling, short-term rental, etc.) should be implemented for more efficient use of resources.
15. Continue to focus on “human capital” initiatives such as employee training, morale, and improvement engagement. The minimal costs to train and improve people skills outweigh the costs of poor quality, employee turnover and bad morale.
Parting post-COVID thoughts
During the shift to a post-COVID mindset, accept that decision makers have shifted their focus to cost containment and cost reduction and that they are going to make decisions that may increase fleet costs – that is, do not confuse economic goals with fiscal realities. Moreover, acknowledge that bona fide cost reduction and efficiency improvement opportunities exist and go after them carefully through a collective effort between management and the operational team. Never assume that fleet cost reduction is solely the responsibility of the fleet management organization and make sure to share this burden with your fleet customers.
In keeping with the principle that necessity is the mother of invention, look for additional opportunities to tackle improvement needs that were ignored during the good times. As an example, fleet management should routinely process-map key functions Finally, recognize that no fleet owner can effectively manage costs it cannot see; cost visibility and accountability are essential for smart, short-term cost cutting and effective continuous improvement using cost charge-back mechanisms that hold both the fleet operation and fleet users accountable.