Recently, I conducted a survey of several hundred fleet managers to identify emerging industry trends. One recurrent theme expressed by fleet managers was their concern that the total cost of ownership (TCO) is starting to experience upward pricing pressures. A truck’s TCO covers a specific range of expense variables, regardless of the make or model. The four lifecycle categories that influence TCO are fixed costs, operating expenses, incidental costs, and depreciation/resale value. A key factor that drives these lifecycle categories is a vehicle’s service life.
Impact on Fixed Costs
Depreciation is a fleet’s No. 1 expense. Typically, the more expensive the asset, the longer it will be kept in service, especially units upfitted with expensive auxiliary equipment. For example, service and utility fleets often have the highest capitalized costs, primarily due to upfitting, and tend to be those companies that keep their vehicles in service the longest.
To keep the fleet within a manageable age, a consistent replacement budget must be maintained. This is especially true for vocational fleets that require reliable vehicles to complete revenue-generating jobs. When downtime occurs it results in the lost productivity of a revenue generator. Companies that rely on trucks to operate their businesses will tell you it runs thousands of dollars per hour for a single truck being down for unexpected reasons. When unexpected downtime occurs there are direct costs, such as lost revenue, towing charges, temporary rentals, and overtime, along with indirect costs such as reduced employee productivity and morale.
Impact on Operating Costs
Longer service lives result in higher fuel consumption, which increases operating costs. As a truck ages, the performance of the vehicle deteriorates, degrading fuel economy. Industry research suggests older trucks can lower fuel economy by 1% or more per year.
In addition, long-in-the-tooth trucks typically need repairs that require longer turnaround times, resulting in longer driver downtime, and are more expensive to return to service. Opinions vary as to the degree of financial impact of extended cycling, but there is one certainty, which no one disputes — maintenance expenses will go up. If they didn’t, the OEMs would not limit new-vehicle warranties by years and miles.
Other negative factors resulting from extended replacement cycling include:
Company Image. The condition of a company’s vehicle is often the first impression a customer or prospect may get of your company, which will be negatively influenced if the vehicle has body damage, rust, or peeling decals. If a company markets itself as a high-quality repair business and the service van shows up with body damage and rust, the customer may relate the presentation of the vehicle to an implied lower quality of repair.
Decreased Employee Morale: A good rule of thumb is that the older vehicle, the more the problems. Breakdowns on the road occur with greater frequency with older vehicles. Not only is the service of the truck affected, but it also affects the operator. If employees aren’t feeling good about the equipment they’re using, or if the vehicle is unreliable, that is going to start to have a negative effect on productivity and morale, which may mean drivers will let their guard down in caring for their vehicles. This, in turn, creates a snowball effect, which can drive up repair costs. As the frequency of repairs increases, many employees perceive the vehicle as a nuisance and do not care for the vehicle’s internal and external condition the same as they would a newer model. The direct result is a diminished resale value due to below-average vehicle condition.
Meeting Tomorrow’s Needs. When truck assets are kept in service for a decade or longer, these assets may grow obsolescent and not optimal for tomorrow’s business. A regular replacement schedule allows you to continuously fine-tune fleet strategy so assets conform to corporate goals, keep pace with industry trends, and are capable of taking advantage of future business opportunities.
Impact of Extended Cycling
As study after study shows, extended replacement cycles have the unintended consequence of greater long-term expenses, degradation in worker productivity, reduced resale values, and higher operating costs — all four of which contribute to a higher TCO.
Let me know what you think.
Originally posted on Automotive Fleet