Contract Hire: The Complete Package
| DOI | https://doi.org/10.1108/eb057251 |
| Date | 01 May 1982 |
| Pages | 10-12 |
| Published date | 01 May 1982 |
| Author | Ron Williams |
| Subject Matter | Economics,Information & knowledge management,Management science & operations |
Contract Hire:
The Complete Package
by Ron Williams
UK Sales & Marketing Manager, Avis Car Leasing Ltd
"Why should we pay for your profit?" is the most com-
mon question asked of Avis Car Leasing. The unravelling
of the answer is the key to Contract Hire. The basic
dif-
ference between Contract Hire and the other major lease
plan, Finance Lease, is that the cost factors in Contract
Hire are guaranteed by the leasing company. In a Finance
Lease the costs are borne by and are at the financial risk of
the hirer.
Contract Hire provides cost control
of cars for a fixed price
Purchasing of cars is an emotional and often
misunderstood task. The true costs involved in operating a
car fleet and the possibilities of controlling those costs are
often not fully recorded or appreciated. If questioned
many Directors would state that the principal cost factor to
control in a car fleet is the front end purchase price and,
once the policy has been decided as to who drives what, the
only cost factor one can control is discount. Since the car
must then be serviced in accordance with the manufac-
turer's service schedule and repaired when it breaks down
how can one control the costs? Not by omitting servicing,
hopefully? Or by obtaining service discounts? No, by
"before the event cost-control". This is a concept often
discussed by Avis Car Leasing and is the basis of their
operating policy.
"Before the event cost-control"
To control costs before they are incurred, rather than to
record them after they are incurred, is the basis of most
other purchasing policies. Plant and equipment is
evaluated in the greatest depth; servicing costs and
availability are scrutinised; Purchasing, Works and
Finance Managers are involved and a decision emerges.
Much of this is lost when we turn to that emotive subject
— the car, perhaps because, alone of capital equipment, a
motor car has a high resale value whereas most plant and
equipment is used until it is virtually defunct. The resale
price is not evaluated to its commensurate degree in the
purchasing equation.
To control costs before they are incurred is a skilled pro-
fession. Few companies would blithely move into a totally
new field of activity and leave the operation of it to a
secretary or junior manager. Most companies however do
this with cars. Do you?
The first step in the cost control plan must be to choose
the correct car. If at the end of the operation you still
decide to let your managers have an imported "XYZ
Coupe Special" at the same purchase price as a Cavalier
then you will be making the decision knowing that its true
cost may be in fact the same as a Royale. If they had
known that perhaps they would rather have chosen the
Royale? Or you could have saved money and offered them
a Viscount?
What are the costs involved?
The largest one is normally depreciation. Not initial price,
but initial price less future resale value. Interest, ever pre-
sent, is applied to the invoice price, plus scheduled service
costs,
plus breakdown fees, plus repairs, plus accidents,
plus insurance, plus tyres, plus cost of purchasing, plus
cost of controlling expenditure, plus cost of recording ex-
penditure, plus cost of selling, are the major items in the
cost of running a car. These must all be evaluated before
formulating the corporate car policy. And this must be
done while still running the business and making a profit to
buy the cars with.
Almost everyone who can drive feels that he can run a
car fleet. Directors have been known to worry to distrac-
tion about one half per cent on the discount (worth say
£15) and lose £200 or more on resale. Discount is a fixed
fact that can be reported upon and checked; resale price
has no fixed yard-stick to measure against. How well are
you doing on resale prices?
If a representative puts two new tyres on his car who
asks what was the mileage? When were tyres last fitted?
What was the discount? Why were they needed? Even, are
they the correct size for his car? Do you in fact have
anyone who knows what size tyres are on his car?
How many times have you had a huge service bill for
your own car and shrugged and paid it? After all they gave
you a good service, didn't they? Before-the-event cost con-
trol entails making the dealer ask before he fits items over
and beyond the call of the service schedule and needs so-
meone on the end of the telephone equipped with years of
experience and all the manufacturers' guide books to tell
whether or not the estimate is correct and even if the work
seems to be necessary. I have seen a perfectly reasonable
service bill queried by one of our maintenance controllers.
The service carried out was for 18,000 miles at a mileage of
only 18,200, so what was wrong? It was the second 18,000
mile service invoice on the same car. Would you have the
records to spot it?
Contract Hire: The Complete Package
Contract Hire gives you all of this control at a fixed cost.
You do not have to participate in the invoice game at all.
Choose your contract hire company, agree the level of ser-
vice you require, negotiate the rentals on a range of cars
and you are off! Off to run your own business.
10 INDUSTRIAL MANAGEMENT + DATA SYSTEMS
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