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Posted April 15, 2017

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Cost containment is not rocket science. That is to say that it is not a difficult subject to comprehend. What is difficult to comprehend is why some businesses do not focus on it as a matter of course. It is not a matter of the kind of business. It is a matter of doing business the right way.

The Case for Cost Containment

It is fair to assume that fleet managers may be consumed with one particular aspect of fleet management efficiency. That would be the efficient operational use of the fleet. On-time delivery is a fair example. In fact, that may be a directive from senior management. Some companies, especially in highly competitive situations, may take a, “Damn the torpedoes. Full speed ahead,” approach. That happens frequently when the business operations focus dramatically toward sales.

More sales do not necessarily increase the number on the bottom line. Expenses come between revenue and profit on every company P&L.

That may be basic, but being that it is true, doesn’t it follow that there ought to be at least as much focus on cost containment as there is on sales growth? The only reasonable answer is “Yes.”

The Definition of Cost Containment

One of the best definitions of cost containment is “the business practice of maintaining expense levels to prevent unnecessary spending or thoughtfully reducing expenses to improve profitability without long-term damage to the company.”

Cost containment, therefore, includes:

  1. avoiding unnecessary spending. This is commonly called “cost avoidance.”
  2. strategically reducing spending. This is commonly called “cost reduction.”

Here’s a deeper look at what containment, avoidance, and reduction mean.

Factor Definition
Cost Containment  A detailed plan and process of maintaining organizational cost and purchased prices within certain specified target limits over a period of time
 Cost Avoidance  An effort to prevent or reduce supplier price increases and ancillary charges through the use of value analysis, negotiations, and a variety of other techniques. (Although cost-avoidance efforts prevent increased spending, they do not result in tangible budget savings and there is a continuing debate over how reporting of cost-avoidance savings should be handled.)
 Cost reduction  A reduction in the costs incurred by an organization which has tangible results; i.e., a reduction in outside spend and/or the availability of funds that can be used for purposes other than originally intended.

Source: http://www1.financialexecutives.org

The bottom line is that you cannot control your bottom line without a continual focus on cost containment.

ESSENTIALS

Cost Containment Begins With Your Budget

There has been a pervasive, pernicious attitude across all businesses that the concept of a budget is to know how much a department, division, or business entity can spend. The corollary to that is that you have to spend your entire budget so that you can get more money allocated to your budget next year.

Not necessarily the smartest thinking!

Budgets should be considered as indicators of operational efficiency. Good managers achieve their corporate goals without spending their entire budget. Great managers do it without exceeding any line item in the budget. But, only great managers focus on cost containment all the time.

Cost Containment Activates with Analysis

With your budget as your guide, the journey to better cost containment commences when you compare your monthly fleet financials against the budget. Think of the combination of the two as your departmental GPS.

  • Your budget tells you where you SHOULD BE.
  • Your financials tell you where you ARE.

First Steps Toward Creating a Cost Containment Program

Step Action
Step One Determine where you are compared to where you should be.
Step Two Determine where you can contain costs by avoidance or reduction.
Step Three Create a plan for each area of improvement.
 Step Four Get buy-in from the people who have a direct impact on those expenses. This includes employees, but it may also include partners in your supply chain.

IMPLEMENTATION

A WORD OF CAUTION: Not everyone is going to like your ideas – especially if it has a direct impact on them.

Elements of effective cost containment programs typically involve negotiating. Brush up on your negotiating skills before you initiate buy-in and implementation.

Common Fleet Management Items Ripe for Implementation

These are common to fleet management, but not necessarily to all fleets. Different types of vehicles and different uses make for different issues. These are provided as a guide for best places to look for better cost containment. The list is not, therefore, prioritized. Prioritization is your responsibility.

Marcus Lemonis boils business improvement to three areas: Product, People, and Processes. That’s a great perspective on areas for better cost containment. Here are a few suggestions – though certainly not an exhaustive list – of areas that may prove to reveal some previously hidden opportunities for cost containment.

  • Product
    • Specifications
      • Are we using the right equipment?
    • Performance
      • Is all of our equipment in peak operating condition?
    • Price
      • Can we reduce the cost of our leases?
      • Do we charge enough for our services?
    • Scope of Service
      • Are we offering the right scope of service?
        • Should we offer less?
        • Which of our services are used least often?
        • Which of our services are marginally profitable?
    • Fleet Size
      • Do we have more vehicles than we really need?
      • Can we find ways to do more with less?
    • Energy Consumption
      • Are we buying our fuel at the right places?
      • Are we buying our fuel at the right price?
  • People
    • Driver Behavior
      • Are our drivers accident-free?
      • Are our drivers taking proper care of their assigned vehicles?
    • Spending
      • Do we need to more closely monitor driver expenditures via fleet card programs?
    • Staff Size
      • Do we employ more people than we really need?
      • Can we improve our multi-tasking?
    • Scheduling
      • Are we managing hours based on business needs?
    • Error Reduction
      • Are we making mistakes that cause added expense?
  • Process
    • Technology
      • Is there technology available to help us monitor, analyze, and control fleet expenses?
        • In house.
        • On board.
    • Predictive Maintenance
      • Is our maintenance program really a repair program?
      • How much can we save by moving from preventive to predictive maintenance?
    • Supplier Consolidation
      • Can we save money by consolidating vendors?
      • Which vendors offer us significant returns on expense?
      • Can we save money by creating a more highly-competitive situation among our vendors?
    • Resource Optimization
      • Is everything in the department being used? (Not just vehicles.)
      • What equipment that we are paying for is sitting idle?
      • What equipment that is sitting idle can be put to better use?
    • Waste Reduction
      • What processes – in-house and on the road – produce waste? (Begin with paper.)
    • Payables
      • Are we being penalized for making late payments?
      • Can we negotiate discounts for paying on time?
    • Receivables
      • What can we do to get our customers to pay sooner without financial incentivization?

Use Technology to Increase Efficiency and Contain Costs

The takeaway here for fleet managers is that cost containment is about much more than simply thinking of a handful of ways to do more with less. Rather, cost containment must be highly strategic, a daily battle found to optimize the resources of your fleet while guarding the bottom line of your organization’s profit and loss statement.

The good news is that modern fleet managers can leverage technology to support all areas of cost containment. For instance, consider cost containment as it applies to driver expenses. Choosing fleet card programs and services that help you monitor driver expense more closely is a cost containment strategy that is highly likely to yield measurable cost savings almost immediately.

More than simply a way for drivers to pay for fuel on the road, cutting-edge fleet card programs combine ease of payment with secure telematics solutions that help you identify and reduce unauthorized fuel spend. EFS’ SecureFuel technology solution is the first known solution to marry telematics data from the truck with the transactional data from the fuel card to better control purchases and prevent unauthorized spending. For example, the SecureFuel application utilizes tank level data from the engine control module (ECM) to help determine how much fuel a driver is allowed to purchase – based on the total tank capacity and level of fuel in the truck at the time of the attempted fueling. In addition, location information provided by the telematics device and GPS technology is used to determine the location of the truck relative to where the fuel purchase is being attempted. The SecureFuel solution can actually decline the attempted purchase if the GPS location of the truck does not align with the location of the attempted purchase. Alternately, the Carrier can simply choose to receive an exception alert if they don’t want to interrupt the driver’s route by stopping the transaction. EFS engineers match the transaction to the tank level through a variety of methodologies not only to dynamically update, limit and/or authorize the transaction in real time, but also to analyze data after the transaction in order to identify purchase irregularities, including triggering real-time email and/or SMS notifications to Carriers. While such technology was unheard of years ago, it is now a powerful tool in the hand of the savvy fleet manager.

The Takeaway

The bottom line is that only you can manage your fleet. Only you can improve cost containment. Taking a proactive approach to cost containment as a two-pronged strategy which includes both cost avoidance and cost reduction, you can help your fleet run more efficiently and help your organization’s bottom line to continue to grow. The information in this article provides a starting point. The time for you to start is now.


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