Episode 114: How to Cut Fleet Costs

Welcome back to another episode of the Fleet Success Show. I'm Tony Yankovich, Director of Advisory Services for RTA's Fleet Consulting Group, and I'll be your host today. I'm joined by my colleague here at RTA, who's a frequent podcast host and contributor and longtime fleet professional, Steve Salzgiver. Welcome to the show, Steve.

Hey, good to be with you, Tony.

I know you're getting ready to hit the road, be on the speaking circuit, hitting a number of fleet conferences over the next several months. So I appreciate Thank you for taking the time to be with us here today. Today we wanted to talk about what fleet managers and other fleet professionals can do to manage costs in their fleet operations. And I thought that Steve would be the perfect guest today since he's managed large corporate fleets, he's managed government fleets at all levels, and has been an advisor to hundreds of fleets over the past couple of decades. So he comes to us with a wealth of real-world fleet experience. So Steve, As organizations continue to struggle managing costs, I thought we could talk about some of the, some of the strategies and some of the things that you have actually implemented in the fleets that you've operated and in those fleets that you've helped over the last few years to actually lower or at least contain costs, if that sounds all right to you.

Sounds great.

And as— great. So as fleet managers, when the CEO, CFO, or city manager or other decision makers come to us, with a directive to lower cost. It's always with a, a what can you do for me today? What can you do for me right now? So what are some of the tactics or near-term strategies, Steve, that a fleet manager can use to reduce costs quickly?

You know, I always go back to there's really two things to reduce costs quickly, and unfortunately it's people and it's assets. So those are really the two big cost buckets. So if you're looking for immediate opportunities to reduce costs, you have to start looking at probably the assets. You know, do you have too many assets? Are you utilizing the assets appropriately? Have you done cost-benefit analyses on those assets to see if you really need them internally or you can, you know, use alternative transportation strategies, things like that? And then the second thing obviously is people. That's the second biggest bucket. And what that means is, you know, are your people productive? Either you have enough or you don't, or you have too many. One way or the other, you need to be able to be balanced and have the appropriate number of staff people. So, to me, those are really the two big ones. I remember years ago, I was working on a consulting project with one of my colleagues that you're familiar with. And we got through an entire two weeks of analyses and everything else. And then the CEO popped into our meeting and says, "Hey, I need to reduce $500,000 by next week." And we're going, whoa, that would have been a nice upfront thing to have happen because we're nowhere close to that, right? And so, that completely turned the entire consulting project on its head. And so, we had to start looking at the bigger rocks to move in that organization, which actually ended up being assets. So, those are the kind of things that you really want to look at. Other fleet strategies. I mean, obviously you want to look at fuel. That's usually in your top 3 fuel costs, especially with fuel.

Let's stick on asset.

Yeah, go ahead.

Let's, let's stick on fleet, fleet assets for a second, Steve. You know, you mentioned that one of the first things to look at are the assets. So how would, how would a fleet manager or an organization go about that? Are you talking about like conducting a fleet optimization or fleet rightsizing study to make sure that they don't have too many assets sitting around that are possibly not being used appropriately.

That's exactly what I'm talking about. Yeah. I mean, hopefully an organization that's cognizant of costs and wants to reduce costs is tracking utilization of those assets, making sure that they're appropriately utilized. I mean, because that's what you really need to do, you know, when you're conducting a right-sizing analysis is start looking at your utilization.

Well, exactly. And Steve, I know that you and I have worked on a number of fleet right-sizing, fleet utilization studies together, and it's been my experience most organizations, you know, missions change, things evolve. What they've done, what they're doing today does not necessarily match what they did 5 or 10 years ago. So there's typically an opportunity to at least right-size or right-type the fleet. So, you know, just off the top of your head, what kind of savings are they looking at in a fleet? Is it, you know, somewhere between 5 and 10%, you think, by conducting a right-sizing study, or is it something more than that?

My real-life experience has always found it's around 5 to 10%, exactly what you just said. I've done a number of rightsizing as fleets that I've managed, and probably the one that comes to mind is when I was at Coca-Cola. We put in a fleet telematics program. That's the very first thing we went after. That was the low-hanging fruit. We were able to reduce our fleet by 10%. I mean, almost immediately within 6 months because we found out which assets were not moving. At all, you know. So that's probably the first thing you want to look at. Hopefully you have some mechanism like telematics or even data in your fleet system to hone in and find those, you know, those underperforming or low-use assets somewhere.

Well, great, Steve. That's a fantastic way to start. And a quick thing, that's the, you know, most organizations when we implement service level improvements and implement changes in the organization, It's going to help them eventually lower costs. But if you really want to hit that dollar figure immediately, unfortunately, like you mentioned, assets and then the people are the next thing. So, you know, generally speaking, what does it take to do a full staffing analysis? I mean, we're not just simply looking at, you know, are the mechanics busy in the shop? It's really a lot more in-depth, a lot more comprehensive than that, isn't it?

Yeah, quite a bit more comprehensive. I mean, hopefully a fleet is tracking metrics, you know, to determine productivity of their staff. I mean, it's easy to do for technicians, for example. You can track direct labor and you can have standard repair times and, you know, implemented in your shop so you can actually measure and monitor those, those tasks that are being performed. But I think that's really probably a good place to start. Typically, people don't get beyond the mechanics though and track, you know, any metrics when it comes to clerical staff or fleet manager staff or anybody like that. So that's something they can really start to look at, I think, if they're going to really start managing staff size.

Absolutely. Well, Steve, I know we talk a lot in our— in the industry and when we do presentations and we conduct fleet consulting studies for people, we talk about the importance of a PM program or preventive maintenance program. And have you found how important it is to have a good PM program and how does that impact the cost down the road?

That's actually the first thing I look at when I go into a fleet. As you know, I just recently got back from a client fleet of managing for about 4 months and they had a nonexistent preventive maintenance program. You know, for all intents and purposes, they had one, but they never really focused on it. You know, that needs to become your number one focus. You know, if there's a number two focus, it would probably be vehicle availability. To me, those two go hand in hand. If you don't have a preventive maintenance program, though, you're not going to have vehicles that are available to be used. So that's really what's key. You know, during my consulting experience and practice, I've seen, you know, costs flip-flopped. You know, you should have, you know, a preventive maintenance program. Your cost should be 80% preventive and 20% reactive or breakdown. I've seen fleets where 20% of their costs were PM and 80% of their costs were breakdown costs, you know. And if you know anything about, or you followed me for some time, you'll, you'll hear me talk about Giesland's Theory of Practice. And right, yeah, he came out and he talked, he showed, uh, you know, empirically that costs are exponentially greater if you don't have a preventive maintenance program. Some of it is even squared. So you take it, for example, say something like a simple thing like a wheel bearing, you know, we all know that that's $20, $30, right? So if you're in a shop, you just replace that wheel bearing because you found it on a PM. It's basically a $20 part. But if you allow that to go out and break down on the road, now your $20 part becomes $400, 20 times 20, because now you got a tow truck coming out. Now you've got a driver stranded on the side of the road. Now you've got maybe a mechanic in a service truck going out there to work on it. You know, whatever the case may be, it ends up being squared essentially. Now, if you were to allow that $20 part to get and cause an accident, so now it's $400 times $400, that's $16,000. And coincidentally, the average cost of an accident is about $16,000, $20,000. So that's really what you need to look at, you know, is it better to do that preventative maintenance in the shop for $20 part or allow that to go out and break down on the road and get— cause an accident at the extreme? For $16,000. So, you know, a lot of people don't equate and pull all that together, you know, but it's all related, you know. So if you're, if you're quantifying costs in your fleet, make sure you, you do it holistically, you know, categorize and track accidents, you know, track road calls, track downtime for drivers, downtime for vehicles. All those things are related.

Well, absolutely, Steve. You know, and, and what people don't necessarily understand is that the PM program is not just an oil and filter change. It's really so much more than that. You know, it's really an inclusive inspection of the entire asset, trying to identify problems before they become breakdowns in the field. So, you know, there's so many soft costs and indirect costs that are associated with breakdowns or road calls that, you know, a fully functional, robust PM program that's proactive in nature is really going to save an organization cost down the road. So, so I agree 100%, PM program should be number, number one on your list. So Steve, um, many organizations that, that you've worked in and that we've worked with over the years have in-house fleet maintenance shops. Um, and generally when people have an in-house fleet maintenance shop, they do most of the work in-house with their own resources, their own staff. Um, but there's an opportunity to really use resources and save money by supplementing some of that work with commercial vendors. So what type of work do you typically see being sublet to commercial vendors to help supporting an in-house fleet maintenance shop?

So the way I look at it is every fleet has its core competency, you know, and that— so it depends kind of on each fleet. But typically what you want to send out is those type of repairs that require specialty work. You know, things like body and paintwork, that's a specialty type work, right? Things like major engine and drivetrain components, that takes specialists to do. You don't want to type a bay in your own shop to do that. So that's kind of what you need to look at. Glass is another one that you may want to send out. Upfitting vehicles, you know, like installing radios, installing equipment as when you purchase it. Those are typically the kind of specialty jobs that you want to outsource. Now, I have come across some shops that are capable of doing those specialties. So it all depends, you know, but what you want to make sure you do is you have a right balance in your shop. You don't want to tie, you're trying not to tie up bays more than 48 hours. That's really what you're trying to do. You know, and so that's what you have to identify.

Exactly, Steve. And a lot of times we'll walk into a shop and we're meeting with the organization and the fleet manager and you see an engine broke down in a bay and, You know, you ask them about it and it's like, well, you know, it's been here a week. We think we're going to get it done in a couple of weeks. But we've got, you know, this mechanic is great at rebuilding engines. He really likes doing it. So, you know, we're doing that type of work in-house. And just because you have someone that's capable of doing it doesn't mean it's always the best thing to do in your shop.

Yeah. Just recently, after managing a fleet for that 4 months I talked about, they had a CAT 730 tied up in a bay for well over a year. You know, how productive can that actually be? You know, you're taking away a bay from somebody, or that vehicle's been down for a year. I started asking, do you even need that vehicle anymore? You know, on some— in a case like that, you know, so you really need to take a look at that, you know. And that goes back to, you know, are you really tracking cost holistically? Do you have everything in place, you know? If you're not looking at labor or if you're not looking at facility space or you're not looking at a mechanic's time or a driver, you know, their time, then it may seem cheaper, you know, to go ahead and just let it sit there and wait for someone to fix it. That's where you really need to have a good chargeback system and you need to be able to track costs.

Exactly. And Steve, you're so right. It really comes down to managing your data, tracking and reporting on your costs, your performance in the shop. So those are very important. You know, the other thing that, that is a big cost in a fleet maintenance operation are parts. You know, parts typically account for somewhere between, what, 25% and 35% of your maintenance repair costs. So what can a fleet manager do to help control the cost of parts?

Well, the number one thing you need to have is a fleet management information system, obviously, to track parts. Once you do that, then usually those systems have a number of mechanisms built into them to, you know, to create minimum, maximum stock levels safety stock levels. They can be organized. The bins can be organized and the locations can be organized so you can get to them quickly. The other thing you can do too to help cost is periodically do inventory analyses to see what's moving, what's not moving. You know, we always talk about inventory turns. Optimally, you want to turn your inventory at least 4 times a year, if not frequent, more frequent than that. So that, that's something you can do to reduce costs. Also, when you're tracking costs in the fleet management information system, you have the ability to enter warranties for those parts, especially on major components like alternators, you know, transmissions if you're stocking those. But those big parts, starters, they usually have a 90 to 120 day warranty and you should be making sure you're taking advantage of that. 'cause that can reduce costs. And this ultimately, just having the right just-in-time parts inventory that's required to, you know, to repair your fleet. You don't want to have too many parts because you tie up a lot of money doing that. A lot of people have actually gone to outsourcing their parts, right? So they only use them on a contingency basis when they actually need them. And so that can save money as well.

Right. Exactly. So you're not actually paying for the part until you actually consume the part, which is a great inventory management strategy. Steve, you hit on something that is near to my heart, and that's warranties. So you mentioned, you know, parts have 90-day, 120-day warranties. The other thing that I've noticed is that if you have a part that's under warranty for 90 days and on the 95th day it fails, you may not get full cost back on that part, but generally if you request from your vendor and if it's a good vendor that you've been with a long time, there's some type of, of, of money back that you can get on those warranty even though they're post-warranty issues.

Especially if you're using the same vendors and you have contracts with those vendors that are formally in place. A number of them will work with you and what they'll do is they'll give you a goodwill payment back. Essentially because they want to retain your business and keep working with you. So yeah, even if it's out of warranty, don't ever hesitate asking for a warranty. You know, a lot of people just, they don't know the value of that.

That's a great point, Steve. And before I interrupted you earlier, you started to talk about fuel cost. And, you know, obviously fuel's one of the biggest costs for any fleet operation. And fuel costs have been up and up pretty steady recently. You know, I did some research recently about the fuel inventory supplies and some of the foreign countries and OPEC have purposefully reduced the inventory levels of petroleum, you know, to spike demand. And with that also comes the increase in price. So what can fleets do to help them manage fuel costs?

Well, don't I know that fuel costs are up? I actually have a diesel truck and I've been taking my side-by-side to the gas station to get my drink in the morning because of that. But one of the things that they can do, obviously, to reduce fuel costs, again, you know, I can't emphasize more. You'll hear me say this over and over. Make sure you have a mechanism or a system to track fuel costs. That's number one. You can't Manage what you can't see. Okay. So as you're tracking fuel costs, a couple of things that come to mind. Take a look at, you know, just do audits on the fuel costs. I mean, are people using the right type of fuel in the right— in their assets? You know, are they using premium fuels? Are they fueling after hours at night? Do you have a fraud problem going on? So you need to audit a lot of those transactions. You know, making sure that you make sure the vendors, if you have your own in-house fuel, make sure the vendors are actually dropping what they say they're dropping, you know, as far as fuel gallons. So there's a number of things that you can really look at. Obviously, you can look at right size or right type in your fleet. You know, if you don't need a lot of large trucks, you can get smaller trucks or smaller sedans. You know, if those applications are working, you could use golf carts and electric vehicles if you need to to reduce those fuel costs. But you have to do it smartly. You know, we always talk about in our world, you know, right typing vehicles doesn't always mean buying just electric vehicles. It might mean buying a small sedan, you know. So those are a number of things you can do to reduce fuel costs.

Exactly. Well, and Steve, you know, one of the things that, uh, you know, it's maybe not as prevalent here in the summer for, uh, most areas of the country, but, uh, idling, you know, I know idling consumes a lot of fuel. And what are some things that organizations can do to prevent drivers and operators from just sitting there leaving their vehicles on?

Um, quite a few things. I mean, if it's a large vehicle like a, you know, Class 7, Class 8 tractor or something like that, or You can actually set the ECM, the electronic control module, to monitor idling and shut— have automatic shutdown after 5 minutes. That's something you can do. You can equip those with telematic units to track that information. One of the biggest eye-openers for me, um, gosh, it's been 10 years ago now when I implemented the telematics at the large beverage company Coca-Cola Coca-Cola, we had, um, we had gone in and done a project to set all of our ECMs so that we had an automatic shutoff at 5 minutes. That took idling from about 40% down to 21%, which was significant if you think about that. You idle about 1 gallon an hour roughly in a truck like that. So when we had telematics and we implemented that, we went from 21% down to 8%. So you think about all the savings that are potentially possible. There's a number of tools out there you can use to do that, you know. And you talk about not only idling and fuel costs, but I mean, you're talking about, you know, air quality and things like that as well that are tied to that.

Yeah, great point, Steve. You know, you also brought up another thing about premium fuel, and my youngest child is 15 and she's just starting to drive. And so took her to the gas station earlier this week and teaching her how to get fuel in the vehicle. And she's like, okay, so which one do I get? Do I get 87? Do I get 89? Do I get 93? And really had no idea. And I showed her the price difference for the different octane levels. But is there really much difference in performance with the premium fuels nowadays?

You know, I've got a gas truck. I use 87. You know, and people always ask me, why don't you put premium in that? I've found that you very rarely ever need premium or mid-grade. But what, how you tell, I mean, your vehicle will actually tell, tell you you need it. If you hear a little knocking in your vehicle, you know, that's usually that little pinging sometimes. But there's very few vehicles out there now that need anything in excess of 87. The rare exception might be if you have a high-performance vehicle, you know, with an engine, you know, like a, I don't know, like some of those Celicas out there that are fast, you know, that, but typically you don't really need to have any fuel. You might, I think a Harley will take a premium, police officers' Harley motorcycle takes premium, but there's very few vehicles out there anymore that take premium.

Well, good. Well, Steven, I think we have time for one more question for you. So, you know, a lot of organizations are acquiring new vehicles, replacing vehicles. So what are some things that they can do as they buy new vehicles to make sure they're getting the lowest price for those vehicles when they purchase them?

Well, first and foremost, you need to make sure that you do some type of bid process or piggyback onto a cooperative agreement of some sort, you know, like a state contract or there's, you know, like there's a Sourcewell out there. But a lot— there's a lot of cooperative purchasing coalitions out there. So that's the first thing you want to look at. Probably prior to that, you want to make sure you put together an accurate specification to purchase that vehicle. You know, I remember going through specifications earlier this year. If you just let someone spec it and you don't have any oversight of that, they'll spec a lot of options that may not be necessary or a lot of technology that may not be warranted. So you want to make sure you go through that, you know, and, you know, and I'm not saying don't buy those things. I'm just saying make sure you're going to use those things and make sure there's going to be a payback or a benefit to it. So those are some possible things that you need to do as you're buying new equipment.

Well, absolutely. And Steve, I think those cooperative bids and those cooperative contracts that are out there and that are available to people, uh, really should be taken advantage of. You know, every state that I'm aware of, um, you know, they have a state contract with several types of vehicles on their state contract that any municipal subdivision can go out and piggyback on those relatively easily and relatively with not much effort at all. So it really does save a lot of time and effort on the side of the organizations that's purchasing. If you don't have to go through that formal process and put it out for bid for 30 days, then you're going to have, you know, 14 to 30, 31 days to review the bids, make an award, you know, get a contract signed. So really, you know, without a cooperative bid, some organizations, especially government organizations, are looking at 60 to 90 days before the contract's signed.

Yeah, absolutely. And especially nowadays, if you're in a government fleet, for example, you can piggyback on typically any government fleet that's got out and purchased. All you have to do is prove that they did their due diligence, you know, to acquire those vehicles. So there's a number of things you can do to reduce the cost of vehicles. Something you can do that a lot of people don't think about that really impacts vehicle costs is standardization of your fleet. You know, if you, uh, that particularly comes back on the operating side more so on the capital side. But, um, take a look at that, you know, try and standardize your fleet as much as possible out there. That saves you on training, that saves you on, uh, you know, parts, that saves you on a number of other areas, um, that can be, uh, over the total cost of ownership.

Well, absolutely. The other thing that I worked in a city fleet for a number of years, and one of the things that we were able to do is we were able to actually bid vehicles and pieces of equipment on multi-year awards. So we would say, okay, we're going to bid this for a 3-year period. And so the cost year 1 is this, and then we would allow a cost escalation factor for year 2 and 3. So maybe we weren't able to jump on a cooperative bid, but at least we had that bid in place for 2 or 3 and maybe 4 or 5 years, which, which really saved the time and effort as well.

Good point. I mean, there's a lot of preparation and detailed work that goes into preparing a bid. So if you can do those long-term cooperative agreements, I think you save a lot of time and effort.

I agree. Well, Steve, I think we've come to about the end of our podcast show today. Is there any other final comments or anything that we didn't hit? I mean, there's, there's so many different things that we could probably have talked about, but are there anything else that we should be aware of that are cost savings opportunities for fleets?

Well, there's probably a number of them. I was just thinking as you were saying you were taking your daughter to fuel and she didn't know what type of fuel to use. There's probably a number of opportunities in fleets where fleet managers could help educate drivers and users of the vehicles because that's probably not unique to your daughter. There's probably a lot of people that are entering the workforce that are driving vehicles that don't know that. The answers to those questions. One of the things that I used to do as a fleet manager is I would do fleet management or driver orientations, and I would, you know, pick timely topics, whether that be safety, whether that be a vehicle operation, whatever it is, just an opportunity to share information and give them some knowledge and network with them. So I think that's something you can't underestimate is helping them learn about the vehicles and what you do as a fleet management operation.

Well, that's a great point because, you know, really the fleet people are fleet professionals. They are the experts in the operation and maintenance of a vehicle. So great resource for people that are driving and operating those vehicles. And I think that fleets should be proactive and, and reach out to those and try to educate as much as possible. So with that, Steve, thank you very much. We really appreciate you joining us today. Thanks for everyone that's listening and joining us and watching us now. We appreciate that. And we'll see you next time. Thank you very much.