‘Sweating Assets’ Can Put Pressure on the Bottom Line
by By Katerina Jones Jan/Feb 2020 2020
Many businesses squeeze every drop of useful life from an asset to cut costs, but Katerina Jones says this practice often causes downward pressure on financial results. Since older trucks have a higher total cost of ownership, operating them often costs more than replacing them with newer models.
One definition of insanity is doing the same thing repeatedly but expecting a different result. This may be true for many heavy-duty truck transportation fleets that try to extract as much life out of their trucks — known as ‘sweating the asset’ — while hoping for better results on their financial bottom line.
Unfortunately, many of these fleets remain challenged financially, since this practice, while avoiding the initial cost of truck replacement, also prevents realizing the significant savings returned through the use of a more efficient unit.
Leveraging Business Intelligence
Data, analytics and business intelligence have evolved significantly over the years, and all three are being used by private fleets and for-hire carriers that find themselves with a significant competitive edge over the rest of the transportation fleets. The power of business intelligence within a fleet operation comes from the ability to take an exhaustive look at the performance data of a vehicle, identify the insight it provides into its utilization and offering a clear way to take action that enhances the business’s bottom line.
Fleets leveraging these technology innovations to drive their business operations end up with newer, more efficient trucks, lower overall costs from reduced fuel and maintenance expenditures and increased safety records and driver retention.
The companies sweating their assets also have more downward pressure on their financial results since they repeatedly have a higher total cost of ownership.
Many organizations followed the long-standing business philosophy of making a hefty purchase order of trucks and driving them for 10 years of service or more as a way to squeeze every cent out of the truck’s usage — essentially sweating the asset.
Economic conditions in a down market put pressure on organizations with transportation fleets to stick with this philosophy. These companies believe it is not prudent to invest in new trucks in a down market, but this is opposite of a sound, long-term business strategy and will erode potential profits in the long term. With truck orders down 71% in September from year-ago comparisons according to ACT Research, it’s possible many firms are opting to take this short-sighted approach and are compromising their long-term strategy.
When fleets drive their trucks as long as possible, they run to the point of functional obsolescence — making decisions based on the truck’s ability to stay on the road. Over time, costs add up for each aging truck in the fleet, and these costs appear to be masked by the avoidance of the cost of investment to replace each unit, which end up significantly eroding their bottom line.
Instead, many firms are taking a distinctive approach.
Finding the Tipping Point
Fleets are now paying closer attention to a truck’s individual tipping point, the point at which it costs more to operate a truck than it does to replace it with a newer model. Elements such as the cost of fuel, utilization, finance costs, maintenance and repair are all factored into arriving at each truck’s unique tipping point, giving fleet operations personnel and finance departments better insights based on data and analytics into determining and calculating the best time to replace an aging truck. This data illustrates a clear ROI and overall cost savings from utilizing a shorter lifecycle.
Fleet operators can realize a first-year per-truck savings of $16,928 when upgrading from a 2015 sleeper model-year truck to a 2020 model. For a fleet of 100 trucks, the savings can reach $1.7 million. These cost savings are only achieved when adopting a shorter asset lifecycle.
Data analysis also shows that a more frequent upgrade to new equipment can save millions of dollars, which can be facilitated by a flexible lease program.
In a recent lease versus buy analysis, results show a shorter lifecycle produces significant savings in fuel expenditures, maintenance and repair costs, which far exceed the slightly higher cost of newer trucks.
The latest asset management software can notify fleets months in advance of when an individual truck or group of trucks will reach their tipping point, giving fleet managers a clear indication of timing for replacing trucks.
This approach offers the flexibility to adjust to changing markets, ultimately driving down operating costs while reinforcing a positive corporate image, driver recruitment and retention efforts by continuously upgrading to newer trucks. Companies are leveraging data analytics and comprehensive fleet studies that produce a fleet modernization and utilization plan, projecting when aging equipment will need to be replaced. This helps fleets plan their procurement strategies more efficiently, regardless of truck orders in peak or falling demand.
Just as significant, alterations to the corporate tax rate, as well as new accounting standards, have made it more attractive to lease equipment. With these changes, at least in the case of truck acquisition, purchase of equipment remains more expensive than shorter-term leasing of the equipment. What’s more, leasing remains the preferred method for companies regardless if they have a stronger or weaker balance sheet and also allows companies to avoid the risk of residual value and the expense of remarketing.
Benefits of Shorter Lifecycles
Shorter vehicle lifecycles also allow for downstream of newer used trucks to the secondary market, giving smaller trucking companies a chance to purchase or lease a four-year-old truck as opposed to a seven- or eight-year-old truck. This allows for the retirement of older trucks much sooner. The retirement of older trucks cuts emissions faster because they are more fuel efficient, contributing to a greener environment for all.
Companies should prioritize assets that are inert or have a long life as assets for purchase. However, companies that rely on sophisticated assets like trucks with high repair costs or energy consumption should be mindful of the risk of economic obsolescence, such as a food service company with a private fleet that typically has low net margins. Being able to optimize asset management and capture savings throughout their supply chain is not only essential to their business model but helps them gain a competitive advantage.
By adopting this new approach of shorter truck lifecycles and monitoring and managing these assets on a P&L basis, industry organizations and transportation corporations’ fleets will become further optimized and they will become better equipped at exchanging their aging truck fleets in a more cost-efficient manner in 2019 and beyond. •
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