The fact is, one of the most critical aspects of running a successful trucking business is properly evaluating your total cost of ownership (TCO). When it comes to your bottom line either sinking into the muck or becoming a shareholder’s dream, a proper evaluation of your TCO will generally determine which way that goes.
Still, evaluating TCO – for any company – can be quite a challenge. So, what’s the problem? Mainly, companies have a hard time figuring out all the different components that go into the total cost of ownership (TCO). When factors that should count towards TCO aren’t measured, a company might not come to a proper judgement on whether their final TCO number is correct or not.
What fleets need to do is learn all the components that need to be calculated to figure out an accurate TCO, and how that TCO can impact the bottom line. Determining TCO enables a fleet to operate in a nimble fashion, in an environment where decisions are made based on comprehensive numbers.
Addressing the Challenge
The proper way to address a TCO analysis is to make accurate comparisons to other fleets of a similar size and makeup as your own. Consider that utilizing generic benchmarks can often lead you down a dead-end street, simply because they are compiled using self-reported data that is very generalized, rather than offering any amount of depth – specifically depth that might apply to your fleet operation.
Here are some examples in which costs are not standardized across the board:
- Fleet age
- Vehicle application
- Vehicle utilization
- Specific financing methods
Furthermore, here are the appropriate questions you need to be asking when you make your comparison:
- Are you evaluating your fleet against a newer or younger fleet?
- Is the application in question one of low mileage or high mileage?
- Is the size of the fleet in question comparable to yours?
- What types of vehicles are used? I.E. Regional versus OTR versus Last Mile
Once you’ve made these identifications, it’s time to take the first step in quantifying your TCO based on the fundamental components you’ve identified.
Quantifying the Numbers
The most effective approach to categorizing your overall fleet TCO is to break your analysis up into three major components.
We’re going to break this all down for you in a neat series of bullet points that you can save for later:
- Investment and Purchase
- Interest rate and payment terms
- Contact maintenance
- Miscellaneous maintenance
- Fleet administration
- General administration
- Other Overhead
- Licensing and insurance
- Legal and taxes
- Safety services
- Employee management
- Sales Proceeds
- Cost of Disposal
- Taxes on Gains
Once you have quantified the numbers using the system listed above, you have better confidence benchmarking fleet performance. You should also be able to better understand in which areas your TCO numbers may fluctuate.
As an example, financing costs, asset depreciation and other administrative costs may change over time. When evaluating your TCO you’ve got to build in a buffer that will consider any major or minor fluctuation in costs. The last thing you need is a big hit to your bottom line because you didn’t take a major fluctuation into account.
Financing and Sticker Price
When it comes to addressing your TCO, one of the areas that trips fleets up is financing fleet acquisitions. Some pay cash while others make large down payments and choose to finance the rest of the balance. Still others might opt for financing nearly the entire amount and then opting for a balloon payment once the initial terms expire.
The question is this: Should you factor the cost of capital into the total cost of owning the fleet. Consider this: Money is never free. For this reason alone, you should be factoring in the total cost of ownership, even when you are purchasing a vehicle with cash up-front.
Consider this: The cash could be in the bank earning interest or be used for another investment, so factoring cash buys into your TCO is an important part of the process.
Also consider what a tractor or trailer costs to purchase. Then, go beyond that. To determine a more accurate cost, there are three basic components you must consider:
- The initial investment
- The capital required
- The depreciation
Have you considered what interest rate you will be paying? Furthermore, what are the terms of your loan? If you paid the loan off one year faster, would you be saving yourself money in the long wrong. What is your opportunity cost in paying cash? These are all appropriate questions that you must consider as you approach the financing angle of TCO.
As you take a closer look at the financing aspect, also consider your fleet’s purchasing power. The bigger your fleet is, the easier it will be for you to leverage that purchasing power as a procurement advantage in the long-run. A big fleet will have a far bigger advantage when it comes to acquisition costs.
Evaluating Maintenance Costs
When it comes to keeping vehicles on the road and promising on deliverables to your customers, fleet maintenance is incredibly important. But did you realize that maintenance is also a vital component of your TCO analysis? Therefore, it is so important to get the best possible maintenance at the best possible price – whether you decide to go with an in-house option or outsource your maintenance needs.
Also consider that two companies with two totally different fleet sizes will have different maintenance costs to consider in their TCO analysis. As an example, the cost of maintaining a vehicle in year five can be totally different than it can in can in year one. Standardizing fleet age helps you more accurately determine costs over the – pun intended – long haul.
A final factor when considering maintenance costs in your TCO is that increased maintenance and repair costs also affect uptime and reliability. They can have a direct impact on CSA scores and whether a vehicle sits idle or is on the road.
Factoring Asset Depreciation
As we mentioned before, fleets finance their acquisitions differently. It’s in this same way that they approach how they depreciate their assets and estimate salvage value.
Factoring depreciation is a complicated endeavor. As an example, many fleet managers record book depreciation. The problem with this method is that it varies based on the selected depreciable life. Essentially, this means you are not accounting for any expected gains once you’ve reached the end of the holding period.
A better way to approach this is to standardize depreciation costs that selects and applies to all equipment across the board, while also making an estimate of what can be gained once the holding period ends. Of course, a cushion would need to be built in as no one knows exactly what will be gained back at the end of the holding period, but estimating a number is a lot better than including no number at all.
The best way to manage this is to assume a 25 percent per-year depreciation over the holding period. Whereas salvage value at the end of the holding period can generally be assumed to come in around 20 percent of the asset’s original value after five to seven years.
Calculating Administrative Costs
The final piece in the TCO puzzle is in administrative costs. The fact is, it’s easy to overlook indirect costs that are associated with operating a fleet of almost any size.
What are some examples of these administrative costs?
- IT personnel
- Fleet technicians
- Human resource personnel
Fleets often forget about their shop and back office when evaluating TCO. Remember, making a proper TCO analysis is about more than just the vehicles being driven.
Administrative costs could even include breakdowns, roadside assistance and repair problems, missed loads and other intangibles that are hard to quantify on the front end. While every operation runs differently evaluating these costs is crucial to determining a proper TCO.
The Final Word
The fact is this: Completing a comprehensive (and correct) TCO analysis is a huge and difficult process. To a fleet – no matter the size – this can seem like a huge beast that they simply cannot tackle. And yet, completing a proper TCO is critical to ensuring you can forecast your finances properly and keep your bottom line intact over the long term.
Does that mean you should outsource your TCO analysis to a third-party provider? The fact is, there are companies out there who will complete this analysis for you. Still, only you have an inside view as to what is going on inside your fleet, from top-to-bottom. There is also an associated cost with having a third-party complete this analysis for you.
In the end, no matter what you do, completing a TCO analysis is critical to any fleet, no matter the size. So, however you consider getting it done, just get it done.