# A fleet purchasing model for finance directors-Magazine
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2017-06-13
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: How to Develop a Robust Fleet Purchasing Model for TCO Reduction
Meta Description: Get insights from Richard Hipkiss on developing a robust fleet purchasing model. Learn how to control costs and navigate economic uncertainty in fleet
URL: https://financedigest.com/a-fleet-purchasing-model-for-finance-directors-magazinehtml

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_The vehicle fleet can be a major source of cost for any business, especially as the supply chain is often full of ‘hidden’ margins. Richard Hipkiss, Managing Director of Fleet Operations, offers finance directors advice on how to develop a more robust fleet purchasing model to withstand economic uncertainty and reduce total cost of ownership (TCO)._

Ongoing economic uncertainty linked to Brexit has raised a number of question marks over the future of fleet procurement.

Potential fluctuations in currency markets, [inflation rates and stock prices could combine to hit](https://www.financedigest.com/uk-inflation-hits-9-4-bolstering-bets-on-big-boe-rate-hike.html "UK inflation hits 9.4%, bolstering bets on big BoE rate hike") businesses hard in the pocket when it comes to purchasing company vehicles.

Consequently, [finance](https://www.financedigest.com/) directors are often faced with a thankless task in attempting to [control costs while maintaining efficient business operations](https://www.financedigest.com/uk-brings-train-operator-transpennine-under-temporary-state-control.html "UK brings train operator TransPennine under temporary state control").

But although this challenge may appear significant, it is far from insurmountable.

First, it is [important to note that there can be substantial variances in lease cost](https://www.financedigest.com/german-gas-import-costs-surge-153-in-first-half-as-imports-drop-24.html "German gas import costs surge 153% in first half as imports drop 24%") depending on supplier, a fact that too often goes unnoticed. For example, the [price differential on certain models](https://www.financedigest.com/leno-bags-market-witness-a-spike-in-growth-pace-recent-improvements-in-pricing-models-fmi.html "Leno Bags Market Witness a Spike in Growth Pace Recent Improvements in Pricing Models: FMI") of [vehicle](https://www.financedigest.com/tesla-launches-new-model-3-long-range-variant-at-42490-website-shows.html) can be anything up to £250 a month, which adds up to a huge gap over the course of a typical four-year lease.

Headline [prices](https://www.financedigest.com/eu-countries-consider-lower-gas-price-cap-documents.html "EU countries consider lower gas price cap – documents") aren’t the only consideration though.It is also important to scrutinise all vehicle-related costs incurred throughout the length of a contract, as [well as how service delivery is measured and monitored](https://www.financedigest.com/precise-remote-monitoring-to-steal-the-north-america-medical-wellness-devices-market.html "Precise Remote Monitoring to steal the North America Medical Wellness Devices Market").

Effective procurement processes should take all of this into account, while being robust enough to withstand possible price increases and threats to the business [bottom line](https://www.financedigest.com/how-high-performers-can-increase-a-bottom-line.html "How high performers can increase a bottom line").

**TCO under the magnifying glass**

One of the most crucial top-line metrics for [finance](https://www.financedigest.com/) directors is total cost of ownership (TCO). This provides a complete picture of each vehicle’s cost [impact by taking into account the entire range of contributory factors](https://www.financedigest.com/sterile-vials-market-share-and-growth-factors-impact-analysis-2021-2031.html "Sterile Vials Market Share and Growth Factors Impact Analysis 2021 – 2031") over the lifetime of ownership.

So, rather than [focusing solely on leasing and purchasing costs](https://www.financedigest.com/cost-of-living-in-focus-as-australias-election-race-hits-final-stretch.html "Cost of living in focus as Australia’s election race hits final stretch") it also includes everything from depreciation, fuel, insurance and maintenance to interest, tax and employer’s NI.

But despite the value of TCO to the procurement process, research conducted by Fleet Operations has found only one in ten [companies currently use this calculation as part of their decision-making or analysis](https://www.financedigest.com/surgical-blades-market-global-leading-companies-analysis-revenue-trends-and-forecasts-2027.html "Surgical Blades Market Global Leading Companies Analysis, Revenue, Trends and Forecasts 2027").

On top of that, it is perhaps surprising to learn that 46 per cent of the companies surveyed admitted they were not even aware of the correct formula for calculating TCO.

This shortage of cost transparency has been accompanied by a [rise](https://www.financedigest.com/uk-car-output-rises-in-august-soaring-costs-cast-shadow-over-recovery.html "UK car output rises in August, soaring costs cast shadow over recovery") in actual cost. More than a quarter of companies (26 per cent) said they had seen lease [costs rise](https://www.financedigest.com/fortum-says-rising-costs-of-nordic-power-trading-are-worrying.html "Fortum says rising costs of Nordic power trading are “worrying”") in the 12 months leading up to the study.

In the face of rising costs, it is essential that finance directors seek to achieve more visibility through scrutiny of the various [factors contributing](https://www.financedigest.com/factors-contributing-to-negligent-security-situations.html "Factors Contributing To Negligent Security Situations") to total cost. Breaking away from sole-supplier arrangements can be the first step in helping to achieve this.

By moving from sole supply to a multi-supplier procurement process, where the business [searches for the best price on every vehicle from a number](https://www.financedigest.com/your-phone-number-on-google-search-giant-now-takes-removal-demands.html "Your phone number on Google? Search giant now takes removal demands") of different suppliers, it is possible to achieve average savings of more than £1,000 per [vehicle](https://www.financedigest.com/tesla-launches-new-model-3-long-range-variant-at-42490-website-shows.html) over a four-year lease.

**A false convenience?**

Businesses tend to [fall back](https://www.financedigest.com/euro-slips-back-below-parity-norwegian-krone-falls-on-planned-cbank-fx-purchases.html "Euro slips back below parity, Norwegian krone falls on planned cbank FX purchases") on the sole supply model due to the perception that it can help to minimise resource and administrative pressures. Busy [finance](https://www.financedigest.com/) departments may envisage a multi-supplier agreement presenting too great a burden on already stretched resources.

Yet, in reality, it is possible to benefit from the same minimal resource [demands with multi-bid leasing if this process is managed by an appropriate outsourced](https://www.financedigest.com/pharmaceutical-contract-sales-outsourcing-market-statistics-demand-and-forecasts-to-2031-examined-in-new-research-report.html "Pharmaceutical Contract Sales Outsourcing Market Statistics, Demand and Forecasts to 2031 Examined in New Research Report") partner.

The drawback of sole supply is that it ties the efficiency of a company’s fleet procurement process to the success of one supplier. In a situation where that supplier is particularly affected by certain fluctuations in the economy, the customer is left more exposed to potential [cost rises](https://www.financedigest.com/harley-davidson-profit-drops-on-rising-costs-and-chip-shortages.html "Harley-Davidson profit drops on rising costs and chip shortages") and less equipped to mitigate the negative impact.

Unpacking the sole-supply agreement also provides the benefit of being able to unpack all the contributory costs that add up to the top-line price. Typically, vehicle leasing providers provide a number of services from third-party suppliers, from accident and risk management to maintenance and fuel management, wrapped up within their fees.

This situation means the customer is unable to negotiate their own specific [terms for each of these services](https://www.financedigest.com/sheet-metal-fabrication-services-market-to-surge-at-a-robust-pace-in-terms-of-revenue-over-2026.html "Sheet Metal Fabrication Services Market to Surge at a Robust Pace In Terms Of Revenue Over 2026").

Looking at service, maintenance and repair, for example, it often seems appropriate to opt for a fully-maintained contract delivered by the leasing provider as a way to accurately [forecast and control](https://www.financedigest.com/emission-control-catalyst-market-is-projected-to-rise-at-above-10-cagr-surpassing-the-market-valuation-of-us-20-06-bn-during-the-forecast-period-2021-2031.html "Emission Control Catalyst Market is projected to rise at above 10% CAGR, surpassing the market valuation of US$ 20.06 Bn during the forecast period 2021-2031") costs while removing the administrative burden.

But [considering the more comprehensive warranty packages](https://www.financedigest.com/4-questions-to-consider-before-embarking-on-a-contract-packaging-expansion.html "4 questions to consider before embarking on a contract packaging expansion") offered by manufacturers and greater [vehicle](https://www.financedigest.com/tesla-launches-new-model-3-long-range-variant-at-42490-website-shows.html) reliability, it may be more effective to simply cover maintenance on a pay as you go basis.

One of the [challenges with a fixed maintenance budget is that the client does not get the opportunity](https://www.financedigest.com/extracorporeal-co2-removal-market-in-depth-analysis-by-trends-opportunities-drivers-challenges-and-growth-factors-by-2026.html "Extracorporeal CO2 Removal Market: In-Depth Analysis by Trends, Opportunities, Drivers, Challenges and Growth Factors by 2026") to specify the quality of materials used. When it comes to parts such as tyres, this can actually cost a fleet money in the long term as cheaper tyres may have an [negative effect](https://www.financedigest.com/negative-effects-of-technology.html "Negative effects of technology") on the efficiency and safety of vehicles.

**Striving for full transparency**

By achieving greater visibility in the provision of each of these supplementary services, it is possible to [set benchmarks for every area of spend and monitor these over time](https://www.financedigest.com/in-line-transit-time-ultrasonic-flow-meters-sales-are-set-to-be-valued-at-us-337-5-mn-in-2021.html "In-Line Transit Time Ultrasonic Flow Meters sales are set to be valued at US$ 337.5 Mn in 2021"), giving finance directors the power to negotiate the cost of each from an informed position.

Unwrapping these elements also allows businesses to choose suppliers that offer the most appropriate reporting and specialist knowledge to help them address specific issues within their fleet.

Outsourced fleet management providers can help [companies to manage all of these relationships](https://www.financedigest.com/building-stronger-relationships-with-insurance-companies.html "Building Stronger Relationships With Insurance Companies"). If this option is selected, it is important for finance directors to ensure service levels and KPIs are built around service delivery to drivers and stakeholders, cost control procedures, delivery of data and reporting, accuracy of data, key compliance areas, and timeframes for key processes such as  vehicle [ordering](https://www.financedigest.com/rheinmetall-wins-quarter-billion-euro-order-for-e-vehicle-parts.html "Rheinmetall wins quarter-billion euro order for e-vehicle parts") and vehicle off-road management.

Ultimately, transparency is key. By taking greater control of the constituent costs that make up TCO, businesses can put themselves in a better [position to withstand any potential fluctuations in the market](https://www.financedigest.com/grab-and-go-containers-market-anticipated-to-have-positive-potential-during-the-forecast-period-fmi.html "Grab and Go Containers Market anticipated to have positive potential during the forecast period.: FMI"). Appropriate [reporting will enable them to identify when suppliers are not delivering on agreed KPIs and make changes](https://www.financedigest.com/u-n-climate-change-report-sounds-code-red-for-humanity.html "U.N. climate change report sounds ‘code red for humanity’") accordingly.

The result is a robust procurement process that help to [unlock greater](https://www.financedigest.com/how-to-unlock-greater-value-from-artificial-intelligence.html "How to unlock greater value from artificial intelligence") operational efficiencies and cost savings from the fleet department.

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“Original publication in Finance Digest Issue 1 https://www.financedigest.com/finance-digest-print-magazine/”
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