The Evaluation of Hertz Using the Balanced Scorecard Approach Would Analyze the Company

Course Project 1

Course Project

Hertz:

Fleet Utilization

Kevin McHutchison

Measurement and Decision Making

December 13, 2010 Course Project 2

The organization that I am currently with is Hertz. Hertz is a multinational leader in the rental car industry. Since it is a service industry quality and efficiency are their top priorities. They focus on rentals that are geared towards business and leisure renters. Within the last five year they began serving the insurance replacement segment as well as the hourly rental car share niche.

Along with renting vehicles they also offer additional services that help to make the rental experience easier and more enjoyable for their customers. These services include premium coverage that allows them to waive responsibility for the vehicle as well as roadside assistance coverage and fuel purchase options. Hertz also offers complimentary pickup and drop off services to all of their customers on the local level.

This allows them to be known better for their exemplary customer service than some of their major competition and sets them apart in their industry on a global level.

The evaluation of Hertz using the balanced scorecard approach would analyze the company’s financial, customer, internal business, and learning and growth perspectives. As a service driven company Hertz’s main source of income and focus is customer service and their corporate strategy reflects that in every aspect of the business. Without the customers any service driven company would be out of business.

The following list is the balanced scorecard evaluation for Hertz’s car rental segment.

Financial success factors: Course Project 3

 Sales – Hertz excels at renting their vehicles for business needs, insurance

replacement, dealership replacement, and leisure rentals.

 Costs – Some of the companies largest cost is depreciation of our vehicles and

Hertz does an adequate job of managing those costs.

 Measures of profit – Hertz tracks all revenue, profit margin, market segmentation,

and company growth on a daily business and makes these reports available to all of

their staff, which helps location managers track their location’s personal growth in

elation to previous periods or the previous year.

Customer success factors:

 Quality – Overall Hertz does a great job in making sure every aspect of their

business is geared towards giving their customers a level of quality they should

expect from a globally leading company.

 Customer satisfaction – Hertz encourages all of their customers upon return of the

vehicle to fill out a survey regarding the level of service they believe they received.

These surveys are taken extremely seriously and are acted upon accordingly to

make the rental process more valuable and efficient for the customer.

 New Markets – Just about 5 years ago Hertz expanded their business into local

branches that are able to service local businesses, dealerships, and body shops in

cheaper short term and local rentals. They also just recently created a new program

called Hertz Rent2Buy which allows customers to try out a car for a few days as a

rental and at the end of the rental they have the option to buy tat car from Hertz for a Course Project 4

fair market price. Their newest venture is called Hertz Connect which is a car share

program that allows customer to rent a car by the hour.

 Environmental management – Hertz has already entered into the environmental

market by adding hybrid and Flex Fuel vehicles to their fleet to offer customers a

chance to be environmentally friendly and save some money on gas. As of 2011

Hertz will also be adding a new fleet of electric vehicles to their green collection.

Also in the cleaning process Hertz uses environmentally safe cleaning products.

Internal business factors:

 Productivity – Location managers are constantly adjusting our schedules to make

the business run more efficiently and productively. Managers adjust employee

schedules to fit into cost savings hour limits, as well as evaluate branch hours for the

individual locations to estimate the value that would be added to the business if they

were open longer or of the costs that could be saved if they closed one or two days

for the weekend.

 Quality – In regards to internal business quality is a big part of Hertz’s everyday

activities. Hertz has initialed multiple customer service programs for employees to

follow when performing rentals or when handling customer objections and

complaints during their rental. This has helped improve the overall level of service

and allows Hertz to build their brand based on quality service.

 Cycle time and throughput – Hertz tries to keep their car fleet on rent as often as

possible so they can eliminate any cycle time and throughput costs. The longer a

car is off rental status the more money it costs the company, so Hertz’s turnover is Course Project 5

almost immediate. When a car returns it is cleaned and inspected and if it passes all

of the quality checkpoints then it is re-rented the same day. If the car needs

maintenance then it is grounded and sent to the appropriate facility to make the

repairs in a timely manner and it is re-rented the same day that it is deemed rentable

again.

Learning and growth:

 Employee empowerment – Employees at every level of Hertz are given the

opportunity to run their locations as if they were their own personal business. This

gives the employees a sense of ownership in the company and gives them a reason

to work harder to increase revenue to essentially help themselves to a bigger bonus

at the end of the quarter and the year. A portion of the revenue generated from

additional service sales is given back to the selling employee every month based on

what level of sales they achieved, which can be a great incentive for the to work

harder to increase their numbers as well as grow their location’s branch.

 Information systems capabilities – Hertz uses various information systems to do their

rentals, track revenue growth, input payroll, and generate business reports daily.

These systems work on real time servers and give an up to date view of any

location’s position within the company at any given time. Each day reports are

generated for the previous day that location managers use to track location

performance and enable them to see the weak spots in their overall strategy so they

can be corrected. Course Project 6

 Product innovation – As stated earlier Hertz is adding new types of vehicles to their

fleet ever year which include the new electric vehicles as well as updated hybrid

models. Hertz has also begun to offer new optional service to benefit the customer

during the rental such as Premium Emergency Roadside Services as well as new

rental protection that is more affordable. These services give the customer new

options to enhance their rental experience.

To further evaluate the company’s profitability the major costs associated with the rental process would need to be taken into account. Some of those major costs include vehicle depreciation, payroll, employee training, quality improvement programs, location facility costs, vehicle downtime, lost sales, vehicle repairs, and fuel. Of these major costs the ones associated with quality are quality improvement programs, employee training, vehicle downtime, lost sales, and vehicle repairs are associated with quality.

The costs associated with environmental concerns would be the cost of finding suitable cleaning products that are safe for the environment, as well as investing in energy efficient vehicles. There will soon be an added cost to recharge the new line of eclectic vehicles Hertz will be adding to their fleet in 2011. Each location will need to be outputted with a designated charging station to accommodate these vehicles.

In regards to quality and the environmental concerns the costs that would fall under the category of prevention costs would be quality improvement programs and employee training. In the Appraisal (detection) cost category Hertz would list their cost to use Course Project 7 environmentally safe cleaning products. The Internal failure category would include the cost of vehicle downtime, and the cost to implement charging stations in all of Hertz’s locations. Lost sales and vehicle repairs are associated with external failure costs.

Hertz strives to maintain optimal productivity levels in regards to their vehicles at all times. They measure how much revenue each vehicle generates over the course of the vehicles life with Hertz as well as measuring employees’ sales numbers in regards to rentals and the sale of optional services. The main measure Hertz uses is the former, how much revenue will a certain car generate over the course of its life with Hertz?

This measure allows them to evaluate the effectiveness of a specific model vehicle’s ability to generate profits. In that measure they include the average rate it was able to generate, how much that model was requested and rented, as well as factoring in the average repair and downtime costs. This gives hertz a clear picture as to what cars they will look into buying to replace this car once it has reached its end with Hertz. If the numbers are right they may choose to keep that same model in their fleet and order more. If the numbers show that the car isn’t generating the desired results that they will substitute the model for a new one in the future and start the evaluation process all over again.

The best measure that Hertz to uses in regards to efficiency and timeliness is measuring the downtime of the vehicles in relation to the time that the vehicles are on rent. This shows Hertz just how long it takes the vehicle to change customer hands as Course Project 8 well as how well they are using the life of car. From this measurement Hertz is able to see how effectively they are utilizing their fleet and where they could use improvement.

The areas to improve could be utilization at their airport or local location, or even efficiency of their repair facilities and fleet hubs.

Recently Hertz started a new phase in their advertising campaigns. They have redesigned their logo to make it more modern and also changed their slogan to,

“Journey on.” All of these changes were implemented to try and reach a previously unsought market segment, 21-30 year olds renting for leisure rentals. They began offering cheaper weekend rates, underage fee waiver coupons, and even began lowing their security deposits. For the most part this advertising campaign seems to be working. People are beginning to notice Hertz more and disassociate the company from their strictly business persona. They have made a swing for the better with this campaign and are getting more members of their target market to rent through them as opposed to their rental counterparts such as Enterprise and Avis.

Hertz does a great job with balancing their productivity and costs to achieve their desired revenue growth each year. Through the use of their performance review processes they are able to streamline the rental process to not only save them money, but also to add value and quality to the rental experience for the customers. They excel at providing excellent customer service as well as utilizing their fleet effectively. They also do well in the area of pricing for their rentals, they strive to maintain competitive against the other rental car companies in the industry. They also maintain a high level Course Project 9 of employee training programs geared towards offering their customers the best possible rental experience.

Some areas where they could use some work however, would be working on reducing the downtime of the vehicles when they need repairs even if it means just switching repair shops or doing the work themselves at one of their hubs. One other solution would be for Hertz to purchase a higher quality of vehicles, meaning lower mileage vehicles. If they cycle out the older models and focus on purchasing newer and more efficient ones then they should be able to reduce repair costs and downtime.

Another are they need to work on is employee empowerment. While they do a great job with the location managers the customer service representatives sometimes feel left out since they are not eligible for salary jobs until much later down the line. Beyond their weaknesses Hertz runs a highly efficient and profitable business and is begriming an upswing that could possible raise their market share in the process.

Hertz runs their business based on the utilization of the fleet of vehicles they purchase to generate revenue and essentially earn a profit. It is in the utilization of their fleet that Hertz encounters their problems. Daily thousands of reservations of made across the country and there are always some that go unfilled.

For every car that sits on the lot it is a loss of revenue that the company incurs.

Hertz always needs to have extra cars in order to fulfill walk up reservations, as well as take any reservations that they can in order to maximize profits and utilization. Hertz is Course Project 10 only as profitable as the number of reservations they have. Herein lies greatest problem.

For every car not rented the company loses out on revenue earning potential every day. At any given moment there are enough cars on each Hertz locations’ lot to fulfill all of the days reservations, which would give them a !00% utilization rating for the day if each of those cars is rented. That is an almost unachievable and undesirable goal. A fairer goal for Hertz locations is to shoot for a daily utilization rating of 80% or higher if possible.

It’s obvious how this affects the bottom line for the shareholders. As stated before

100% utilization earns the company maximum profit and helps the shareholders line the pockets a lot more. For every car not rented they lose some of the profits and their wallets don’t fill up quite as much. Essentially the main aspect of shareholder confidence in a company is their profit margin. So Hertz aims to increase that number as much as possible through the utilization of their inventory.

Along with the effect that the shareholders feel there are also the effects that the company itself has to endure. Every year Hertz buys thousands of vehicles based on demand averages from the previous year. They purchase new cars in a variety of brands and styles according to customer feedback and average time a car was on rent.

The theory is that the more desirable cars are the ones that are requested and rented more frequently. So for those cars to sit on the lot over night, not rented, it costs the Course Project 11 company enormous amounts of money.

Not renting the entire day’s inventory also has telling effects on the employees as well. Every day the employees, in the local branches for instance, are doing all they can with marketing to help grow their business and essentially make the phone ring. A lot of time in money goes into the marketing so that when the phone rings the employees can book as many reservations as they can to get to that almost unattainable goal. If reservations are missed or never fulfilled then it becomes a waste of time to have the employees market in the first place, thus creating a new issue of a loss in productivity and morale.

Financially the loss of rentals has immediate effects on the employees. For one their bonuses are based on the amount of revenue their location was able to generate during a set period in time, usually by quarter. The next way it affects them is in the hours they work. Some employees are compensated hourly and the number of hours a store is open is based on how many rentals their location fulfills on average. If for instance the location in question doesn’t see too many weekend rentals then the location could be shut down on the weekends, which would eliminate the opportunity to make overtime for the employees who work there. The loss of these opportunities to the employees can also put a damper on morale and make the work environment tenser and less manageable.

One effect that the local community and the environment would feel from Hertz not Course Project 12 renting all of their cars would be the cars themselves. For the community the downside comes in when there are an abundance of stationary cars sitting in a parking lot, in a strip mall for instance, taking up parking spaces that customers of that strip mall could use. Sometimes one local location may close with as many as 10 cars on their books which will turn into a burden when it comes to storing those cars in the parking lots around the locations. The environment suffers when there are a mass amount of cars sitting idle in one place. When the cars are on rent the customers take them home so they are essentially no environmental threat when it comes to leaking fluids and runoff.

However when there are 10 or more cars in one location with oil and fluid runoff it could potentially cause a contamination to water runoff. While this is not something Hertz can account for it is still something to consider.

When thinking about the entire scope of this problem a few solutions spring to mind.

The first being the most obvious, create a larger demand so they can rent more cars; the second would be for Hertz to move unneeded vehicles to locations that can essentially use the cars, and the third is create a vehicle management system that would reshape the rate structure to more accurately reflect supply and demand.

The first solution, create a larger demand for the inventory, is as stated before the most obvious solution. If Hertz spends more money marketing to create a larger demand for their services then essentially each location will see an increase in rentals and therefore and increase in revenue growth. On the positive side more revenue growth means an increase in employee bonuses, morale, and shareholder wealth. The Course Project 13 downside is the new costs to increase the marketing done for the company.

The second solution, move the unused vehicles to locations who can use them, is a bit more costly and time consuming. This would require the employment of more transporters as well as an increase in their hours so that they are always available to shift the inventory to maximize utilization. Payroll is one of the company’s highest costs and increasing that cost with this solution may not be in the best interests of the shareholders. The upside of this solution is that the company could more effectively move their fleet to make their 80% utilization goals.

The third solution is to create a vehicle management system that can effectively manage rates to reflect the supply and demand for the fleet. This solution would allow

Hertz the opportunity to maximize their profits and minimize their loss from unused inventory. The major cost associated with this solution is the man-hours the system’s creation would require from the IT department. Essentially this system would allow the rates to increase and decrease based on supply and demand and in the end would help the locations increase their revenue and profits to help the company build shareholder wealth.

Hertz’s biggest issue comes in with their lack in utilization of their vehicle fleet. This issue affects the organization, the shareholders, the employees, the community, and the environment. A few possible solutions are available for the company to help increase their profitability and utilization. Those solutions include creating a larger demand; Course Project 14 move unneeded vehicles to locations that can essentially use the cars, and create a vehicle management system that would reshape the rate structure to more accurately reflect supply and demand. Hertz has an opportunity to use this issue as a way to make their organization more profitable overall. Course Project 15

Reference

Jackson, S., Sawyers, R., Sweeny, D. Anderson, D. (2008), Managerial Accounting and

Statistics, Custom Text by Cengage