April/May 2019 Edition
by Brian Holland, President and CFO, Fleet Advantage
Truck procurement has been the foremost challenge for private fleets, for-hire carriers and organizations that rely on trucking across many industries, including manufacturing, energy, retail and construction. This challenge has been heavily emphasized by the backlog of orders for Class-8 heavy-duty trucks, largely stemming from an American economy that has been healthy and robust ever since the Great Recession ended in 2010, and an outdated industry philosophy toward truck procurement which is finally changing.
Class-8 truck orders and sales continued at a healthy pace through the majority of 2018, as many companies saw the need to upgrade into newer equipment or add to their equipment to handle the extra demand in shipping goods via the nation’s economic activity. According to ACT Research, Class-8 net orders made 506,300 units at the end of November, the second-strongest 12-month order period in history, trailing only the 12-month period ending October.
Monthly orders (28,082) still outpace the number of units being manufactured (27,973) as of November, and while this gap is narrowing it continues to show extraordinary demand for new trucks.
Especially for oil, gas and construction brands, these organizations will continue to feel the results of an order backlog into 2019 if they continue their asset procurement strategy based on functional obsolescence as opposed to economic obsolescence. Firms that reduce their asset management lifecycles based on a flexible lease model will be able to plan their substitutes better and thus avoid the discomfort associated with the current backlog.
The vibrant economy means that more firms are shipping materials to job sites or commodities across the country; more businesses are in need of re-stocking shelves and inventory; more consumers are in need of goods ordered online and thus the transport of those shipments; and as a result, trucks are working overtime.
Trucks and transportation have been the essence of this economic engine.
Replacement and truck procurement strategies that help the economy stay active need to be cautiously deliberated as we get further into 2019 when companies take a closer look at their bottom line.
The long-standing business philosophy was for companies to make purchase orders of trucks en masse, while driving them for anywhere between five and ten years of service, or even longer, as a way to squeeze every penny out of the truck’s usage. However, data and analytics are proving this model to be pricey and highly unproductive. Instead, private fleets and for-hire carriers are gathering that they can achieve more savings on the truck’s overall impact to the bottom line, as well as maintenance & repair (M&R) – the top variable and volatile cost of a fleet operation by moving to a shorter lifecycle.
When construction businesses drive their trucks as long as they can, they operate on functional obsolescence – making choices based on the truck’s capability to stay on the road. In most cases, when companies let the truck dictate the schedule for replacement, they are left struggling to order a new truck based off limited planning cycles. Today’s backlog of truck orders is a result of this, as the multiplier effect of many transportation firms and this philosophy have caught up to them.
Instead, today’s leading companies are taking a new approach.
Organizations are now paying closer attention to a truck’s individual TIPPINGPOINT®, the point at which it costs more to operate a truck than it does to replace it with a new one. Features such as the cost of fuel, utilization, finance costs, and M&R, are all factored into arriving at each truck’s unique TIPPINGPOINT®, giving fleet operations staff and finance departments a closer look based on data and analytics into controlling and even predicting the best time to replace an aging truck.
For example, a recent analysis of long-term ownership compared to shorter lifecycle management demonstrates a significant cost savings over time. A fleet that opted for a four-year lease model on a truck would save around $27,893 per truck in comparison to a seven-year ownership model because of the aforementioned factors such as fuel, utilization, financing, and M&R. The shorter lease model is also cost-effective when compared to just a four-year ownership model, showing average savings of $12,710.
This approach offers flexibility to acclimate to changing markets, decreasing operational costs while maintaining a positive corporate image, driver recruitment and preservation efforts by constantly upgrading to newer trucks. Corporations are leveraging data analytics and wide-ranging fleet studies that produce a fleet modernization and utilization plan, projecting when aging equipment will need to be replaced. This is especially efficient with today’s changing demand and the current booming economy as businesses trying to acquire equipment merely based on demand are faced with equipment shortages and long lead times.
Recent changes to the corporate tax rate, as well as new accounting ideals, have made it more appealing to lease equipment. With these changes, at least in the case of truck attainment, purchase of equipment remains higher compared with shorter-term leasing of the equipment. What’s more, leasing remains the favored method for companies regardless if they have a stronger or weaker balance sheet. In addition, leasing also allows companies to evade the risk of residual value and the expense of remarketing.
By implementing this new outlook of shorter truck lifecycles, industry organizations and transportation companies will become better equipped at substituting their aging truck fleets in a more cost-efficient manner as we get further into 2019.
Editor’s Note: Brian Holland is President and Chief Financial Officer at Fleet Advantage, a leading innovator in truck fleet business analytics, equipment financing and lifecycle cost management. For more information visit www.FleetAdvantage.com.