Reliable Total Cost of Ownership Data is the Key to a Healthy Bottom Line:
A recent study found that most small fleets (1-24 units) continue to use industry-standard metrics for Total Cost of Ownership (TCO) and that mid-sized fleets (25-99 units) are having trouble getting the customized and targeted TCO data that they need.
Do you calculate the total cost of ownership for your fleet? The units in our fleets are high-cost assets, and getting the most value out of the investment that we make in them is the best way to improve a logistics company’s bottom line. The quality of the data you use is crucial to your ability to make the right decision. To get the most out of your trucks, you need customized TCO data.
We’ve all heard the stories about that owner-operator who is a million-miler, and he did it all in the tractor that he bought to start his business with, right? But have any of us ever met him? And even if he does exist, he’s the exception—not the rule. In today’s logistics industry, wise fleet management means marshaling resources to build and protect value. We have to let go of biases and take the blinders off!
Customizing Your Fleet’s TCO Calculation
We all know that the industry’s biggest fleets are using big data to squeeze every ounce of value out of their operations. For small and mid-sized fleets, investing the time and resources that it takes to get accurate, customized TCO data can seem like a Catch-22. But new technology makes it possible to get all of the benefits without devoting critical resources to more administrative staff or high-dollar equipment.
Industry-standard data is exactly that. It gives you the cost per mile for the entire industry and averages out the differences in fleet size, industry segment, and other factors that can make a big difference. The best way to leverage TCO is to calculate the actual numbers for your fleet. Once you have that information, benchmark your fleet’s performance against other fleets that are similar in size and duty.
Maybe your fleet tracks TCO by combining the initial cost of each unit with the maintenance cost over its term of service. If you subtract the value that you get from the sale of that unit, the data that you get is probably more accurate to your fleet than the industry-standard data. Still, there is a lot that you can do to make your TCO calculation more valuable to your business decisions.
Graco, a leader in the industrial, manufacturing, and processing sector offers a more detailed calculation for TCO: TCO = I + (O + M + D + P) – R. They argue that the actual cost of ownership for a piece of equipment is the result of initial cost combined with operating costs, maintenance costs, downtime, and production costs, minus the remaining value at the end of that equipment’s term of service.
Drilling Down: The Six Factors in TCO and How to Apply Them to Your Fleet
You might be wondering whether more detailed analysis of your fleet’s TCO is worth the time and effort that you’ll invest in getting it. We think that it is. We don’t accept that detailed, accurate, useful information is something that only large fleets should have access to. We believe that when small and mid-sized fleets take advantage of better TCO data, they become more competitive and that their business benefits.
We’re going to spend some time applying the formula that Graco provides directly to the operational challenges that fleet managers face when they try to maximize the value of the investments they make in their small and mid-sized fleets.
A recent blog post argued that it was possible to design a truck with an eye toward improving your fleet’s TCO. The author devotes a lot of attention to how difficult it can be to spec a unit that will deliver the maximum return on your investment. We look at this question from a slightly different perspective. When you’re doing TCO right, your ability to spec units to get better TCO results will improve over time.
The key to improving your bottom line is to generate as much profit or value as possible from every dollar that you invest in your business. If you’ll get better returns by spending more, then it makes sense to do that instead of buying the cheapest option possible.
Another way that quality TCO data can improve our fleet management decisions relates to the weighing of the pros and cons relative to leasing or purchasing new units. The Ernst & Young study that we cited earlier in the article makes a strong argument for giving leasing options a careful and unbiased consideration.
Without embracing or rejecting that argument, we can definitely say that it’s important to know what all of your options are before you can say that you’re spending your budget in the best way possible.
For the logistics industry, this category would factor in the measure of fuel costs, licensing, taxes, and administrative costs. It could also be the category where you factor in the cost of operator compensation.
Calculating the cost of maintenance and repairs is something that our industry has been focused on for some time now. It has helped clarify the value of investing wisely in preventative and routine maintenance programs. It has also helped us minimize downtime and maximize productivity without writing off the resale value of a unit as the cost of doing business.
When we track maintenance and repairs accurately, we get to see how each unit is performing individually in comparison to other units with the same specs as well as how it contrasts with units having different specifications. We can also get a longitudinal perspective on the category of remaining value that helps us decide when to let a unit go.
When a unit is taken out of service for routine maintenance, we are usually able to plan those activities in such a way that we avoid the hidden costs of lost production, lost customer confidence, or even lost accounts. But when a unit breaks down or requires unscheduled maintenance, it can disrupt our operations and lead to the types of secondary costs that can have a significant negative impact on our business.
Tracking downtime as part of your TCO is one of the best ways to get a clear picture of the additional risks that you take on when you extend the life of a unit to the point where it is consuming more value from your fleet than it is contributing.
Cost of Production
For most fleets in the logistics industry, the cost of production and cost of operation are going to be the same. Depending on the specifics of your operation, it might make sense to separate certain factors into these two different categories, but for most trucking companies, operation and production are one and the same. You’ve got to make the miles to make money.
Anytime you purchase a new unit, it begins to depreciate the moment you drive it off of the lot or take delivery of it. Managing the remaining value for your fleet is a constant balancing act between two questions. How much is it worth on the open market? How much more profit can we generate from it before it costs more to operate than we can make with it?
As we mentioned in the discussion of initial costs, taking a serious look at leasing options introduces another set of variables into this calculation. But to make confident decisions about the difference between purchasing and leasing over 5, 7, or 10 years, you’ve got to be able to predict the future.
When you commit to a strong TCO program now, you’ll get to the point where you’re able to predict the future accurately in fairly short order.
What Will TCO Do for You?
When you’re basing your business decisions off of your gut, you’re at risk of letting your own biases steer you toward an outcome that is less than optimal for your business. Similarly, when you rely on industry standards, you’re choosing to make business decisions with blinders on. In either case, there is a better way to get things done.
Small and mid-sized fleets need to take advantage of the insights that quality TCO calculations can provide. That’s the only way to know for sure that you aren’t leaving money on the table or even throwing good money after bad.
When you use the data from your own fleet to calculate actual TCO and benchmark your fleet’s performance with comparable fleets in the industry, you’ll know exactly how you’re doing and what you can do to do better!
FleetPal can help you get a better measure of your fleet’s TCO. Our software solutions make fleet management and maintenance easier and more efficient for end-users. The data that you generate using FleetPal can be easily integrated into your TCO monitoring program. Give us a call to learn more about how we work with fleets and service providers to help them improve their bottom lines.