COST CERTAINTY, COST ESCALATION & COST REDUCTION

COST CERTAINTY, COST ESCALATION & COST REDUCTION

Modern companies operate in an increasingly competitive environment that constantly puts pressure on management to do things faster, better and with more efficiency. The need to stay ahead of the pack often creates a situation where costs escalate or where hidden costs impact your budget before you even realize what is happening. Unexpected maintenance, repairs, driver incidents and compliance requirements can all eat away at your bottom line in ways that can be extremely challenging to manage. However, using real-time data and analytics to see what s happening across your fleet today and what s likely to happen tomorrow, you can proactively manage the potential impact before costs add up.

STRATEGIC EVALUATION OF FLEET EFFICIENCIES THAT DRIVE CERTAINTY AND SAVINGS The opportunity for lowering total cost of ownership is not a static or singular event. In the increasingly competitive environment in which businesses operate, companies need to continuously evaluate their operations to ensure they are maximizing every opportunity to create efficiencies and lower expenses. It begins with a solid fleet cycling strategy that aligns with business goals and ensures that the financing of the vehicles and equipment takes advantage of the company s current financial health and position. ONCE A VEHICLE HAS BEEN ACQUIRED AND IS ON THE ROAD, WHAT ELSE CAN A COMPANY DO TO ENSURE THEY ARE MAXIMIZING THE INVESTMENT IN THAT ASSET AND MANAGING COSTS TO PREVENT ANY UNFORESEEN ESCALATIONS OR UNWANTED EXPENDITURES?

USING BIG DATA TO GAIN A COMPLETE UNDERSTANDING OF OPERATIONS The first step towards creating an environment where cost certainty is the norm is to implement a robust telematics and data analytics program. This will provide insight into exactly how your fleet is performing in real-time and provide opportunities to dig into areas where costs seem to be rising. Additionally, new solutions using advanced analytics algorithms are beginning to shift the focus from simply tracking and reporting on fleet operations to a more targeted approach that pinpoints the specific items that impact a fleet s operating expenses the most. Data analytics has helped to introduce management through outliers essentially, uncovering and addressing those vehicles within a fleet that are having the greatest impact on the year-over-year cost and reliability of a fleet. It is a simple, but important axiom of business: YOU CAN T MANAGE WHAT YOU DON T KNOW. Together, this data can help companies monitor, maintain, and control costs to optimize fleet performance and prevent unexpected escalations. ADVANCED DATA ANALYTICS IS ALSO HELPING FLEETS DETERMINE THE SWEET SPOT I.E. JUST THE RIGHT TIME TO RETIRE A VEHICLE AND GAIN MAXIMUM RETURNS, WHILE ENJOYING DECREASED MAINTENANCE EXPENSES AND ADDING FUNDS TO A FLEET S BOTTOM LINE. $

HIDDEN COST DRIVERS THAT CAN IMPACT YOUR FLEET AND YOUR BUDGET Having a more complete understanding of your fleet using Big Data and analytics can help you develop strategies for better managing costs and reining in unexpected escalations that can devastate your bottom line. There are also some traditional areas of fleet management that companies should evaluate to ensure they have the best practices in place and that hidden cost drivers are not waiting to sabotage the best laid plans and budgets. HIDDEN COST DRIVER #1 FAILURE TO ADHERE TO RECOMMENDED PREVENTIVE MAINTENANCE SCHEDULE From a maintenance perspective, tires, brakes and preventive maintenance are the highest spend categories for a fleet. Some companies extend their preventive maintenance intervals as a way to reduce costs. While this may initially save money on items such as oil changes or tire rotations, in the long term, performing maintenance less frequently usually results in higher repair and tire costs. These costs often far exceed the money saved on preventive maintenance. Extending service intervals also increases the amount of time between safety checks by a certified technician, causing some of these maintenance expenses to rise over time.

HIDDEN COST DRIVER #1 FAILURE TO ADHERE TO RECOMMENDED PREVENTIVE MAINTENANCE SCHEDULE An analysis conducted by ARI s Strategic Consulting group on the overall repairs performed on vehicles that clients were servicing every 5,000 miles/8,000 km (versus those that were waiting until higher intervals) found that for fleets that had extended intervals: Brake repair costs were higher, as more vehicles required rotors and calipers due to the pads not being checked as frequently Tires had longer periods of time between rotations and air pressure checks, which can increase wear and tear and affect fuel efficiency Safety-related issues increased with heavier fleet vehicles

HIDDEN COST DRIVER #1 FAILURE TO ADHERE TO RECOMMENDED PREVENTIVE MAINTENANCE SCHEDULE The results of the analysis displayed a consistent trend in favor of units with on-time preventive maintenance. The team identified 167,893 units with late preventive maintenance results; the excess monthly cost on these units was almost $8 million. It will always cost less to address repairs early; costs are significantly higher in terms of mechanical failure and associated downtime. By extending maintenance intervals, your fleet may fall into a critical gap where engine and powertrain failures occur prematurely. Units with LATE PREVENTIVE MAINTENANCE services incurred MONTHLY COSTS that were 47% HIGHER than units with on-time preventive maintence services. The cost of such repairs and failures will likely negate oil change savings achieved through extended maintenance intervals. SMART ORGANIZATIONS ARE NOW USING TECHNOLOGY, TOOLS AND DATA TO HELP MONITOR MAINTENANCE REQUIREMENTS AND IDENTIFY MAINTENANCE TRENDS THAT CAN BE PROACTIVELY ADDRESSED BEFORE MORE SIGNIFICANT FAILURES OCCUR.

HIDDEN COST DRIVER #2 POOR, OR NO MANAGEMENT OF FUEL Fuel usage can amount to as much as 80 percent of a fleet s variable costs and as much as 60 percent of a fleet s operating budget. Even when prices are low, companies need to be sensitive to fuel usage and always be proactively taking steps to ensure this line item does not sky-rocket out of control. Every organization should have a written policy on fuel usage. A written policy defines the expectations for drivers around fuel and sets parameters around acceptable fuel practices. A SOUND POLICY SHOULD INCLUDE: The rules around fuel card usage The desired grade of fuel for each vehicle in your fleet Preferred fuel providers Steps to take in the event of a damaged or lost fuel card Other information that might be specific to your organization The policy should be communicated to drivers both new drivers as they join the company and existing drivers on an annual basis. Additionally, make the policy and tips for reducing fuel consumption part of any routine required for driver training.

HIDDEN COST DRIVER #2 POOR, OR NO MANAGEMENT OF FUEL Encourage drivers to adopt driving behaviors that conserve fuel. Behaviors that encourage fuel conservation are the same behaviors that promote increased safety and sustainability. Remind drivers to observe the speed limit and avoid aggressive driving maneuvers. ACCORDING TO THE U.S. DEPARTMENT OF ENERGY, SPEEDING, RAPID ACCELERATION AND HARSH BRAKING CAN LOWER GAS MILEAGE BY: 15% - 30% at highway speeds up to 40% in stop-and-go traffic Also, every time a driver goes over 50 mph by 5 mph costs the company an additional $0.17 per gallon of gas. Simply observing the posted speed limit and driving in a safe manner can help your organization use less fuel and improve the bottom line. Fleets should also consider incentivizing drivers. By bringing them into the equation and providing them with a target and potential recognition or reward, you are going directly to the person who has the biggest impact on your fuel costs and providing them with the motivation to think about their behavior (and do better, hopefully).

HIDDEN COST DRIVER #2 POOR, OR NO MANAGEMENT OF FUEL Modern fleet management systems can help fleets proactively monitor fuel usage and use data analytics to take a deeper dive into a fleet s fuel consumption. Using a fuel policy as a baseline for evaluation, fleet managers can now track miles per gallon and cost per gallon through specific reporting. When paired with a comprehensive review of fuel card data to ensure there is no misuse, companies are able to gain a complete picture of their overall fuel spend and spot outlying behavior that may indicate a problem that needs to be solved. THIS EMPOWERS FLEETS TO TAKE A MORE PRESCRIPTIVE APPROACH TOWARDS LOWERING THEIR FUEL EXPENSES AND LOWERING THEIR OVERALL TOTAL COST OF OWNERSHIP.

MANAGING FUELS COSTS ONE FLEET S STORY A large vocational fleet reduced their fuel spend by developing a multi-pronged program that focused on the reduction of fuel costs across their fleet by targeting four key elements that are essential to controlling fuel costs. First, the organization developed and implemented a fuel management policy that became the foundation of the company s expectations for drivers. The company then introduced an MPG (mile per gallon) improvement plan. Through focused reporting and analysis, they were able to identify the best of the best and worst of the worst in terms of MPG results across different asset groups. This allowed them to take targeted action which included consistent communication to the front line with strategies and best practices for improving this important metric. The company also introduced a CPG (cost per gallon) improvement plan. By using some simple tools and technologies, the drivers were able to know of and choose lower cost alternatives. Finally, the company closely monitored fuel card use, specifically watching areas of potential abuse and error. Holding drivers accountable for their fuel card habits has created a ripple effect across the fleet. With over 8,000 units enrolled in the program since mid- 2013, this proactive program has paid dividends in terms of reduced fuel consumption and savings. They have documented over $1 million in actual savings in 18 months. This has been accomplished mainly through an improvement of MPG but they have also captured real dollars in a relative (to market averages) reduction of the cost of fuel.

HIDDEN COST DRIVER #3 ENGINE IDLING TAKES A TOLL ON YOUR FLEET AND YOUR BUDGET Reducing engine idling has become a common objective for fleet managers. Corporate initiatives to reduce fleet spend combined with government mandates to decrease harmful greenhouse gas emissions are driving organizations to develop strategies to limit idling. While traffic conditions and unforeseen events make it nearly impossible to completely eliminate engine idling, it is an area where most fleets can identify opportunities to reduce fuel consumption, maintenance expenses, harmful emissions and even improve their companies sustainability image.

HIDDEN COST DRIVER #3 ENGINE IDLING TAKES A TOLL ON YOUR FLEET AND YOUR BUDGET IDLING OF VEHICLE ENGINES TENDS TO CREATE UNFORESEEN EXPENSES IN TWO MAIN AREAS: 1 INCREASED FUEL EXPENSES Engine idling can waste more than a half of a gallon of fuel per hour, depending on the vehicle s engine size and whether the air conditioner is running. The resulting effect may potentially be thousands of dollars needlessly spent on fuel. 2 INCREASED MAINTENANCE EXPENSES On average, one hour of idling is equivalent to approximately 30 miles/48 km of engine wear. Engines are most efficient when operating at steady engine loads, such as highway driving. At cruising speeds, the engine is at its optimal operating temperature, allowing for complete combustion of the fuel. Letting a vehicle idle for an extended period of time does not allow the engine to reach its optimal cylinder pressure and temperature. Under these operating conditions, the fuel does not undergo complete combustion and may contribute to maintenance issues such as: Contaminated engine oil/sludge Accelerated engine wear Premature spark plug replacement additionally, carbon build-up on valves and piston rings may contribute to drivability issues Higher levels of carbon monoxide (CO) and hydrocarbon (HC) emissions Damage to exhaust system components, including catalytic converters (gasoline) and diesel particulate filters (DPF)

HIDDEN COST DRIVER #3 ENGINE IDLING TAKES A TOLL ON YOUR FLEET AND YOUR BUDGET When it comes to idling, simple changes in driver behavior can lead to meaningful reductions in total cost of ownership and greenhouse gas emissions. In pursuit of such opportunities, companies should engage experts to assist in analyzing the impact of idling on their fleet and how to implement idlingfocused rules into your vehicle policy. With the support of key stakeholders and an openness to adjust the fleet culture and policy, such initiatives may yield significant financial results. Fleets can also deploy telematics and data management solutions to monitor idling, allowing them to know which drivers are not adopting the policy once it is put into place. Regardless of the industry or vehicle types, minimizing or eliminating idling presents a universal opportunity for reducing operating expense and implementing green initiatives. Through active management of excessive idling, fleets can benefit from reductions of emissions, fuel and maintenance expenditures, and have the benefit of demonstrating environmental leadership. ALTHOUGH EVERY FLEET DOES NOT NECESSARILY HAVE AN IDLING PROBLEM, IT IS IN EVERY ORGANIZATION S BEST INTEREST TO FULLY EXPLORE THE FREQUENCY OF IDLING AND POTENTIAL SAVINGS OPPORTUNITIES ASSOCIATED WITH IT.

HIDDEN COST DRIVER #4 NOT MAXIMIZING ROI A vehicle lifecycle is made up of three main phases: 1 ACQUISITION 2 OPERATION 3 REMARKETING Many fleet managers focus on the first two phases and often neglect the third. This is a critical mistake. While the value of the asset has reached its useful end for the organization, it has not lost its value entirely. The goal for every fleet should be to replace a vehicle before maintenance costs and downtime begin to rise, and at a time in the vehicle s life when resale values remain meaningful. Determining how to reach that goal can vary from fleet to fleet. A fleet manager can realize tremendous benefits and advantages by implementing an optimal replacement cycle for each vehicle or segment of vehicles in a fleet. Successfully remarketing vehicles in order to maximize the return on investment is one way of reducing the overall cost of ownership. THESE BENEFITS CAN RANGE FROM DOWNTIME REDUCTION AND LOWER OPERATING COSTS, TO KEEPING UP WITH THE FAST-CHANGING SAFETY AND TECHNOLOGY FEATURES IN MORE RECENT MODELS. MOREOVER, FLEET MANAGERS CAN BETTER ENSURE THE SAFETY AND COMFORT OF THEIR DRIVERS IN THE PROCESS.

HIDDEN COST DRIVER #4 NOT MAXIMIZING ROI Companies should also be sure to evaluate the needs of their business and their current fleet. Are there gaps that need to be filled? Are there vehicles not being fully utilized or sitting idle? Knowing the specific operational needs of each business unit and reviewing the existing specs to make sure the fleet aligns with the business requirements of the organization helps create a foundation from which to fully maximize ROI. If an analysis has been done in the past, but it has been a while since it has been reviewed, it should be updated. Consider whether vehicles that are being underutilized need to be replaced at all. Knowing where the fleet stands, before beginning to develop or alter a plan to cycle vehicles out of the fleet, will ensure that the final results will have a positive impact. Fleet managers have access to volumes of date, but they need tools to parse that data to gain insight and clarity. Companies can look at maintenance expenses (both recent and yearover-year comparisons), evaluate fuel expenditures, and assess downtime across different vehicle segments. The transparency and insight gained from such granular data evaluation empowers fleet managers to make better decisions. Take a hard look at the vehicle s specs to see if they can be simplified or pared down. THE RED FLAGS THAT APPEAR AS A RESULT OF A THOROUGH EVALUATION OF YOUR FLEET S DATA SHOULD BE FOLDED INTO THE LARGER EFFORT OF BUILDING A SOUND REPLACEMENT STRATEGY THAT DRIVES ROI.

CONCLUSION There is a reason why fixed costs are labeled as fixed and variable costs are labeled as variable. Variable costs no longer need to be unexpected and with the right tools, technologies and analysis, fleets can prevent some variables from changing too dramatically. It is critical to invest in partnerships and tools that help companies approach the fleet and its data strategically, so they can dig into the areas where costs have a tendency to escalate (such as maintenance and fuel) and uncover hidden drivers. USING THAT SAME DATA TO ENSURE THAT THE LONG- TERM FLEET INVESTMENT IS MAXIMIZED IS JUST AS IMPORTANT, AND CAN GO A LONG WAY TOWARDS GETTING A HANDLE ON COST ESCALATIONS.

About ARI ARI, a Holman Enterprises company, has revolutionized fleet management with technology that enables organizations around the world to realize new levels of efficiency and value by leveraging the power of data through the ARI insights portal and other customized solutions. Founded in 1948, ARI, now the largest familyowned company in the industry, has continuously uncovered new ways for fleet managers to translate their fleets data into decreased costs and improved driver safety. ARI manages more than 1.3 million vehicles in North America, the UK and Europe, and together with its strategic partners, more than 2.3 million vehicles worldwide. Headquartered in Mount Laurel, New Jersey, ARI has been recognized as one of the 100 Best Companies to Work For by Fortune magazine for five years in a row. Learn more at arifleet.com and on LinkedIn, Facebook and Twitter. (856) 778-1500 Global Headquarters 4001 Leadenhall Road Mount Laurel, NJ 08054 United States of America