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Rentals / leasing – An effective tool to deal with changing requirements

Fleet Optimisation Strategy may be a good idea, but external factors make it necessary to deal with a ‘moving target’ in terms of the mobility capacity

With business and industry cycles constantly changing: How can companies deal with changes in mobility capacity and flexibility?

In the last article it was concluded that a Fleet Optimisation Strategy was a good intervention for organisations to increase the cost-effectiveness and efficiency of their fleets.

rentalsA roadmap was presented to allow organisations to systematically deal with improvements of utilisation, application and through Innovation.

While the application of a Fleet Optimisation Strategy may fundamentally be a good idea, the reality is that external factors make it necessary for organisations to deal with a ‘moving target’ in terms of the mobility capacity required – as well as the types of vehicles required to execute the task. It is for these real-life scenarios that organisations should optimise the manner by which short- to long-term rentals are leveraged.

What options are available to organisations to deal with different types of mobility needs?

Essentially, fleets organisations have three major options to provide for their mobility needs in terms of term committed to the option: (See illustration in the next column). This means, of course, that each of the options comes with pros and cons.

If used appropriately, each of the options makes perfect sense and contributes to an organisation’s ability to balance contractual commitment. Risk on the one hand, with different corresponding price-levels charged on the other.

How effectively are rentals deployed in the fleet / mobility environment as a strategic instrument?

Clearly it is difficult to generalise in this regard, but unfortunately, one comes across a high number of instances where rentals are not optimally deployed. The primary reasons for this appear to be

  • The non-alignment of the overall corporate strategy with the mobility strategy;
  • The non-consultation of the fleet department in making strategic decisions;
  • The asset acquisition budget being managed separately from the OPEX budget, and companies unconsciously or consciously choosing to accept an overall higher cost through OPEX;
  • The avoidance of long-term contracts for a variety of reasons; and
  • The lack of a coherent mobility strategy and/or ignorance regarding the financial implications of short-term rentals relative to longer-term options.

Ironically, many companies jump on the Total Cost of Ownership bandwagon to ‘save a few cents’ on fuel consumption and driver behaviour, while the cost of short-term mobility is often three times as expensive as longer-term options!

There is a widely held perception that especially SA parastatals or government departments could significantly reduce their mobility expenditure by finding a more optimal balance between shorter term mobility commitments and capacity, planned for over the longer term. The same holds true for all companies – whether in the private or public sector.

What principles should be applied in defining a “balanced” short- and longer-term mobility capacity strategy using Rentals as an instrument?

The logic deployed is not dissimilar to other areas in the business exposed to cyclical volatility, such as HR capacity, cash-flow, etc., namely, to

  • rentalsEstablish as best as possible the minimum reserves of mobility capacity needed for an extended period (which would differ from segment to segment), say three years;
  • Determine the maximum cost that the internal/external client is willing to pay for the mobility to be provided;
  • Compare the different options for the provision of mobility in terms of cost relative to committed period.
  • Build scenarios based on the different time-duration options available, e.g.: Period – Year 1: 30% short-term rental; 40% mid-term rental/lease and 30% long-term asset ownership and the same for the rest of the period; Compare the mobility cost of each of the respective scenarios and then take a decision on the best-committed cost versus the flexibility option; Select the best partners for the deal and structure the agreements in the best possible manner.

A diagrammatic overview of a typical planning model is shown in the slide displayed in the next column.

What options are available in the market to facilitate companies to effectively share risks and benefits with Third Party Rental or Leasing players?

Unfortunately many current contracts with very prescriptive leasing conditions in terms of time and/or mileage are not reflective of the real need of companies. Despite this, many companies still choose these relatively impractical options as opposed to find practical long-term rental solutions that are more flexible and provide a better solution.

Typically some of the aspects to look out for in ‘modern’ solutions include

  • Contracts that are generic per vehicle type that is being rented or leased – as opposed to being individual vehicle driven (this is often referred to as a Base Requirement Number (BRN) logic);
  • A mechanism where one mobility unit (BRN) is simply replaced with another once certain parameters are reached (e.g. age or mileage);
  • BRN pricing is standardised for all vehicles within a certain functional group (e.g., one-ton pickup) irrespective of the age as long as it fulfils functional requirements;
  • Agreements on the sharing of risks associated
    with cost-per-kilometre (CPK) and residual value (RV) of vehicles; and
  • Shared decision-making and lead-times to reduce or increase capacity given real-life events, which are normally not accommodated in traditional leasing contracts.

The use of different-term rental/leasing contracts is an indispensable tool in fulfilling mobility requirements in a volatile environment. Companies or fleet owners can achieve a competitive advantage if this is done properly – or significantly inflate the mobility bill if done incorrectly.

New leasing / rental contractual models exist, which allow for third party rental / leasing companies to play a prominent role in ensuring or enabling business flexibility and success.

 

 
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