In the current company car climate tactical agility trumps strategic planning

09 Sep In the current company car climate tactical agility trumps strategic planning

In March we talked about the global vehicle shortage and how company car fleet operators can mitigate the impact on their vehicles and drivers.

At the time, BCG were predicting a worst case scenario of 2025 before supply is stabilised, although we are seeing a slight easing in supply issues that suggest normality may be reached before then. However, the situation is far from over, and our experience tells us that both manufacturers and lessors are dragging their heels when it comes to attracting new business, deterred by the obvious supply issues and the opportunity to exploit punitive contract renegotiations.

Valueless Request for Proposal’s (RFP’s)
Our dealings with manufacturers have seen increased prices, reduced discounts and cancelled orders … which normally result in re-orders at a higher price, whilst lessors are hardening their credit terms and offering rental pricing that is extremely volatile.

As such any RFP in today’s climate will produce little value.

To maintain control of the situation and mitigate cost creep, (although in these conditions it’s more likely to be cost acceleration!) tactical interventions are key. Strategic moves will be too slow to produce much-needed supply chain management, so some key tactics are essential:

#1 Commercial compliance
Keeping the lessor on track against all the agreed commercial terms can be quite a challenge. And if it is not kept on a tight rein the terms within the contract can become open to interpretation!

Ungoverned contracts provide opportunity for the lessor to apply margins to costs that would not materialise if the contract was being managed tightly and robustly. And when in fact a company car fleet of 500 vehicles or more could have as many as 60 individual costs types assigned to the fleet cost centre, that is a lot of room for canny manoeuvring.

The challenge of cost-creep only becomes apparent once the contract reaches mid-term. Dramatic savings are often achieved in the short-term as the contract is fresh, the lessor is eager to please and the finance department are only handling a small number of invoices.

However, once the contract reaches mid-term and the lessor is looking to claw back something because they are behind budget, the cars are maturing and incurring costs, and the finance department are becoming flooded by invoices against costs buried deep in the original contract, then cost-creep becomes a very real issue.

So, keep a watchful eye on terms, and make sure they don’t deviate.

#2 Contract adjustments
The current squeeze on vehicle supply means real value can be created by negotiating contract adjustments and extensions:

• Mileage reduction
  • Over recent years we have seen that actual mileage invariably ends up lower than forecasted mileage. Hybrid working patterns, the emergence of zoom meetings and a wider acceptance of work/life balance are all contributing to less time on the road. A simple forecasting exercise based on the mileage run rate will help plan those vehicles likely to be under-mileage at contract end. Renegotiating the vehicle contract mileage downwards will result in a reduction in rental
• Contract extension
  • Depending on the revised mileage, extending a contract should have a similar effect. An end-of-contract mileage forecast is calculated from the current mileage run rate and a quote obtained from the lessor. The effect of the requote can then be measured against the excess or credit mileage payable if no action is taken. These are open to negotiation, so a 4 year lease dropping from 80,000 miles to 50,000 miles should deliver a rental reduction of 15% – and we would challenge anything less.
• Resale profit share
  • The surge of demand for second hand vehicles has pushed the resale value of company cars skyward. And lessors are currently enjoying significant windfall profits on the resale of vehicles at the end of their term. So much in fact that we know of lessors achieving an 80% increase in resale figures. We can leverage this by requesting a contract re-price, based on higher residual values than when the term started, and the higher the residual, the lower the rental.

#3 Playing the game
Knowing when to accept an adjustment or a re-write is also key to making the most of an opportunity. It is not uncommon for lessors to review mileage and offer a seemingly attractive contract re-write with reduced rental. However, although a genuine attempt to provide savings, what they are really trying to avoid is the repayment of any credit mileage facilities that would give credit should the vehicle came back under mileage.  And in some cases we have seen substantial  credits returned on under-mileage vehicles.

In this current market (short vehicle supply, strong user car market) we see huge opportunity to take a renegotiation to the supply chain. Using experience and agility, a specialist such as Fleetworx can leverage these tactical contract nuances and make significant savings for our clients.

If you would like to discuss the opportunities to review your tactical agility then do not hesitate to contact Tom Osborne or Graham Rees on +44 (0) 1926 353300, or complete this form and we will be in touch with you.