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How a multi-supplier purchasing strategy can help future-proof your fleet

By / 5 years ago / Comment / No Comments

When the Office of National Statistics (ONS) announced the latest inflation rate for the UK, there was a snippet among its figures that should have acted as a red flag for fleet operators.

Apparently, inflation stayed steady at 0.3% during February because a rise in food prices was offset by a decline in second-hand car prices. The cost of second-hand cars fell 5.6% year on year in February, continuing a trend that should give fleet operators food for thought when it comes to vehicle purchasing.

Greater vehicle depreciation essentially means greater risk, particularly in the case of outright purchase or lease finance agreements. Businesses should be incredibly wary of residual values and take steps to ensure they are protected against fluctuations in these values.

Market analysts will publish residual value forecasts but these figures only tell half the story, given residual value ultimately comes down to how much a used-car buyer is prepared to pay, rather than the perceived value of the vehicle.

 

Variances of up to £2,000 on residual values

Leasing vehicles via contract hire agreements can be the first step in mitigating the effect of falling second-hand car prices. Fleet operators are protected from declining residuals during the lifetime of the lease agreement as costs are agreed up front and the onus falls on the leasing company to cover any shortfall.

However, if second-hand car values continue to slide, leasing providers may look to maintain profit levels by raising costs. Although leasing providers will take into account residual value forecasts when devising costs, it is very difficult for them to remain completely insulated from fluctuations in the market.

On top of this, all suppliers do not forecast residual value uniformly, meaning there can be discrepancies of up to £2,000 in predicted residuals from different suppliers.

This means fleet operators can mitigate fluctuations and continue to minimise costs if they are smart about their purchasing strategy. A multi-supplier model is particularly effective in this respect as it means businesses are not at the mercy of a sole supplier if they do decide to raise costs.

 

Multi-bid at the heart of a robust strategy

Put simply, multi-bid leasing allows operators to benefit from the lowest possible lease costs by searching for the best price on every vehicle in their fleet from different suppliers. In a sole supply agreement, a company may choose a supplier because they offer the best deal on certain makes and models, but this will not necessarily be the case for all vehicles they require.

Looking beyond residual values, to factors such as interest rates, economic growth or even the impact of Brexit, businesses must have a robust enough purchasing strategy in place to weather any potential storms.

Although all of the factors above may have an impact on costs, providers rarely raise prices uniformly. Instead, prices will rise at different times by differing gradients, which means fleet operators can still mitigate the effect of market variances in a multi-supplier model.

If an existing supplier increases costs, the fleet operator is not tied into an agreement that means they simply have to swallow this. Instead, when adding new vehicles, their specifications can be put out to the market in order to obtain the most competitive price.

 

Future-proofing through a holistic view

A multi-supplier purchasing strategy can play a key role in future-proofing a fleet, particularly when supplemented by other initiatives designed to mitigate the effects of external factors.

For example, applying a best practice approach to risk management, rather than simply meeting basic legal requirements is an investment that can reap rich rewards, reducing the cost of maintenance, insurance premiums and fuel.

A combination of regular licence checks, risk assessments, incident reviews and driver behaviour monitoring can provide a wealth of live data, allowing areas of risk or inefficiency to be identified and monitored.

Targeted training and driver education schemes can then be used to extract improvements from the workforce, helping to reduce the risk of incidents and improve efficiency.

Working within a multi-supplier framework gives companies flexibility to work with accident management, risk management and fuel management partners of their choice rather than those appointed by a leasing provider. This allows them to choose providers who will best address the specific challenges faced within their organisation.

All told, more businesses should give consideration to breaking the traditional mould of the sole supplier model. The perceived difficulty of managing multiple supplier arrangements is overplayed and the benefits in terms of cost reduction and flexibility too great to be ignored.

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Natalie Middleton

Natalie has worked as a fleet journalist for nearly 20 years, previously as assistant editor on the former Company Car magazine before joining Fleet World in 2006. Prior to this, she worked on a range of B2B titles, including Insurance Age and Insurance Day.