Fleet Management Best Practices – Part 6, Section 2: Contracting and Vendor Management
By Steve Saltzgiver, Fleet Success Ambassador
Last week I covered Section 1, Fleet Outsourcing. Today, I will take a deep dive into Section 2, on Contracting and Vendor Management.
CONTRACT ESTABLISHMENT AND MANAGEMENT
The move toward contract management can be traced to the increasing cost and complexity of fleet management endeavors over the last 20 years and a simultaneous increase in emphasis on effectiveness and efficiency – particularly in the face of competition from contract providers of fleet management services. In short, the complexity of fleet management today often produces significant economies of scale, which often can be captured only through collective effort. Today’s fleet management organization must frequently explore the feasibility of establishing a contract with each vendor to provide an effective, turn-key solution. Implementing formal contracts with defined service level agreements for high-use vendors to optimize economies of scale and maximize services offering efficiencies is critical for performance.
Written policies and procedures should exist to ensure contracts are cost-effective, take advantage of technological advances, comply with applicable rules and regulations, and facilitate standardization of fleet composition. Organizations should also utilize and leverage cooperative purchase agreements (i.e., state contracts, Sourcewell, etc.).
Vendor contracts must be reviewed routinely, and rates must be renegotiated annually based on volume, service, and technology changes with high use outsource providers. Vendor accountability is strengthened using Service Level Agreements (SLAs) outlining requirements and responsibilities for servicing and maintaining vehicles and equipment. Each SLA should include the electronic capture of data to analyze usage trends and each cost center is required to adhere to asset assignment standards, policies, and procedures.
Internal Service Agreements
If you want to better manage service provider expectations, an SLA is a must. An SLA is a mutually negotiated agreement designed to create a common understanding about services, priorities, timelines, metrics, and other responsibilities. By providing a shared understanding of expectations and priorities, an SLA serves as a great communication tool to prevent conflicts.
However, to be continuously effective, an SLA must be considered a living document. Routine reviews should be performed on a predetermined timeline to assess adequacy and renegotiate any changes or adjustments.
Accomplished correctly, SLAs are an objective basis for gauging fleet operations and service provider effectiveness and will better ensure both parties use the same criteria to evaluate service quality and performance.
SLA Service Components
Essentially, a service level agreement must incorporate two sets of components: “service standards” and “management focus”.
- Maintenance or other services to be provided by vendor.
- Service Standards, such as time frames, breaches, remediation.
- Responsibilities of both parties.
- Costing details, including escalation factors.
- How service effectiveness levels will be tracked.
- Communication, and how effectiveness will be reported.
- Conflict resolution procedures.
- Review/revision procedures (Quarterly, monthly, etc.).
For an SLA to be successful, service providers must be part of the initiation and development process. Creating an effective SLA requires spending time researching information, analyzing data, documenting workflows, and negotiating.
Primary steps in establishing an SLA are:
- Data gathering (highly dependent upon the effectiveness of computerized fleet management software).
- Consensus between parties.
- Outline responsibilities of both parties.
- Draft, implement and manage the agreement.
The primary reason organizations enter into SLAs is to improve the effectiveness and efficiency of service delivery. This said, there are many benefits for both fleets and service providers.
Benefits of an SLA:
- Establishes clear performance expectations of the fleet and service provider.
- Clarifies roles and responsibilities for both parties.
- Places attention on both parties’ priority needs.
- Promotes a service quality culture of continuous improvement.
- Supports a mechanism for both parties to plan.
- Places purchasing power into the hands of the fleet.
- Serves as a useful tool to monitor performance.
- Service providers are in a superior place to plan their delivery function.
- Provides greater certainty of consistent income for service providers.
Key Elements of an SLA:
An SLA is an agreed measure that might include one of the following elements to describe the performance of a service delivery:
- Quantity and Quality
- Timeliness and Cost
- Attribute: SLA Expectations
- Availability: Operational Hours Open 8:00 a.m. – 6:00 p.m. weekdays
- Responsiveness: Same-day service
- Timeliness Speedy Processing: Work orders or invoice mailed/emailed in 24 hours
- Reliability Accuracy Billing: 99.5% accuracy
- Equity: No complaints about unfair treatment
Before defining SLAs, both parties must describe all the services to be provided and define current performance to create a baseline for comparison. In most cases, SLAs should indicate the minimum level of performance.
Setting Key Performance Indicators (KPI):
The next step is to agree on how these will be measured. Following are just a few examples of KPIs included in an SLA:
- Action Response Parameters Goal – Service breaches must be reported immediately, and timely action must be taken by both parties.
- Visual inspections relating to vehicle serviceability specified in the owner’s manual will be made at the beginning of every working day.
- All other service matters affecting serviceability are reported by users through vehicle logs and will be addressed by the service provider on before the vehicle is available for use if a roadworthiness issue: Measurement = 95% -100%.
- Fleet vehicles will be regularly serviced in accordance with OEM requirements – Fleet vehicles requiring service will be scheduled for the service within 24 hours of service coming due, or within 24 hours of the return of the vehicle to Fleet after use: Measurement = 100%.
Setting Results-Oriented Measurements:
Creating performance measurements is a crucial part of the monitoring process. This has a significant impact on how the maintenance operation’s overall performance is managed. This builds a culture of trust and transparency which promotes buy-in and buy-in unifies each party around the purpose of the SLA.
Gather, Use, and Analyze Data:
When data is properly assembled and analyzed, it can give organizations insight into their service and performance.
Accumulating Performance Data:
Having performance data increases accountability and provides a baseline of information from which trend data and success/failure rates can be achieved.
- Invest time and money to make it right.
- Ensure performance data is accurate and means something.
- Define and measure the right thing, and then measure it right.
- Centralize the data collection process at the highest level possible. Analyze Data…Then Use It.
Having accurate data is half the battle. SLA parties must be able to understand it, analyze it and use it to improve service performance.
- Combine anecdotal feedback and performance data for a more complete picture.
- Frequently perform root-cause analyses exercises.
- Ensure all stakeholders view the results of the data analyses.
Service authorization procedures should ensure that appropriate controls are in place over the services and costs provided by a vendor. Such controls are particularly important as vehicles approach their planned replacement dates. To ensure the cost-effective utilization of in-house maintenance resources and to minimize maintenance and repair turn-around time and downtime, processes should be in place for scheduling work into a shop in advance and for performing minor repairs while the driver/operator waits. Service hours and scheduling processes should be flexible enough to accommodate vehicle users’ work schedules, but also should seek to maintain a steady flow of work to technicians and avoid peaks and valleys associated with unplanned service demands.
Service providers must be relied upon to perform fleet maintenance and repair services for a variety of reasons, including managing in-house work backlogs; avoiding costly investments in facility construction, tooling, training, and staffing; to meet low volumes of service demand in remote areas or for specialty repairs; and to achieve a degree of flexibility (e.g., in terms of locations, hours of service, etc.) in the provision of services that is not possible with civil service system constraints and sizable investments in fixed fleet maintenance infrastructure.
The cost-effective use of vendors requires, however, that procedures be followed for 1) determining the comparative cost effectiveness of performing a service in house or using a vendor; 2) managing and controlling vendor performance relative to individual service orders and ongoing service levels (in the case of contract providers of services); and 3) capturing all relevant information on vendor-performed services so as to maintain a complete record of vehicle maintenance history and costs and provide for timely user billing via a charge-back system.
All these authorization processes and metrics must be included as part of the established SLA document.
The service provider (i.e., vendor payment) process must be formalized in writing. Each process in the workflow must be memorialized and thoroughly understood by all parties. Many organizations utilize a commercial-off-the-shelf (COTS) financial software application integrated with a COTS FMIS to provide formal structure and workflows governing the contractor vendor payment processes.
A key aspect of the contract payment process must include a separation of duties accounting (SODA) process. An example of SODA process is defined as no one person has sole control over the lifespan of a transaction. Ideally, no one person should be able to initiate, record, authorize, and reconcile a transaction. This is a best accounting practice defined in the generally accepted accounting principles (GAAP) protecting all parties.
A typical contractor and vendor payment process would generally include something like depicted in the following Oracle Financial system workflow:
Although each vendor payment process may vary slightly depending on the software application utilized, the key thing to remember is that a formal process must exist to optimize, streamline, to maximize accountability and effectiveness of processing payments. Payment processing has become streamlined in the last few decades by automating online payment to maximize productivity and efficiency. Many payment transactions today are accomplished using ACH platforms. An ACH is an electronic fund transfer made between banks and credit unions across what is called the Automated Clearing House network. ACH is used for all kinds of fund transfer transactions, including direct deposit of paychecks and monthly debits for routine vendor payments.
Fleet organizations must partner with their financial partners to set up an effective contractor and vendor payment process. Moreover, if the FMIS can be integrated in the payment process, this helps document and streamline these payments.
CONTRACTOR/VENDOR PERFORMANCE MANAGEMENT
Repair quality assurance procedures are used to ensure that requested services are performed properly. When repairs are not completed correctly, the vehicles are often returned resulting in “comeback” repairs. When they occur, comebacks are costly and annoying, so they need to be tracked and followed up on. It is important that comebacks be identified and handled properly with each service provider for several reasons:
- Vehicle user (i.e., fleet customer) is not pleased with the repair that must be returned to the shop.
- Comeback may have occurred because the initial defect report failed to clearly describe the problem. If this is the situation, a review of the original service request with the service writer and/or operator may be in order.
- Mechanic may have improperly diagnosed and/or performed the repair and therefore, some retraining may be needed; and
- Parts used may have been defective and some follow-up with the supplier may be needed.
One of the best strategies in managing comebacks is avoiding them all together and ensuring remedies are outlined in the SLA. This generally involves a formal workflow to examine post-repair and service review. A process called a QCI (Quality Control Inspection) must be part of the SLA described above. Quality checks can range from simple road tests, to quality checklists, and to complete observation of the repair. No matter what procedure is used, good quality programs are integral to ensuring customer satisfaction. It is impossible for fleet managers to be always all places and, therefore, to assess the appropriateness of maintenance activity and performance solely based on subjective judgment, first-hand observation, and second-hand information.
The development and analysis of management information enables managers, supervisors, and trade workers to develop insights into aspects of their performance and opportunities for improvement that might otherwise not even be detected. Accurate, complete, detailed, and timely collection of maintenance activity and cost data through work orders is the foundation on which maintenance performance measurement and improvement processes rest.
The best practices involved in the outsourcing of repair and services can be complex. Thus, the rational to place formal structure and documentation around these workflow processes. Obviously, this blog cannot include all the processes that should be included in developing a formal outsourcing process, but those processes outlined above can serve as a good starting point.
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