A fresh look at TCO
From the April 2022 print edition
TCO has traditionally stood for total cost of ownership. This has been a methodology of accounting for fleet costs over the lifetime of the assets. The TCO equation adds lifetime depreciation and operating costs to acquisition costs and subtracts the residual value of the asset.
Every part of the equation has increased over the past two years, making fleet assets almost “too costly to operate.”
What’s a fleet manager to do? Prioritize the capture of cost data and invest time in analysis that will lead to cost reductions.
Since the world shut down due to the COVID-19 pandemic in March 2020, fleet costs have been on the rise. The factors leading to price hikes include global uncertainty, supply chain interruptions and, most recently, the war in Ukraine. Inflated prices are being felt in almost all aspects of fleet. Most important are the following:
- Vehicle purchases. Even though individuals and many fleets have been driving less, the demand for new and used vehicles has gone up. With stocks low due to supply chain issues, prices are forced upward.
- Fuel. The US is facing unprecedented fuel price hikes due to limiting the import of Russian fuel.
- Staff. Drivers and technicians are two categories of workers that are hard to come by. Scarcity drives up salaries and organizations have to pay more for skilled labour.
In response, the unfortunate choice of many organizations is to delay needed replacement, thinking they will save money. Delaying replacement, however, leads to higher maintenance costs. In fact, maintenance costs are often far more than the capital costs avoided by not replacing vehicles when due. Only advanced data analysis will help organizations understand the cost trade-offs and make the right decisions.
Data and automation
If you do not have a fleet information management system, telematics and automated fuel pumps; it is past time to get them. Fleet is a data-intense field and cost data is essential in guiding acquisition decisions. Automation is the mainstream for fleets and the utility of the tools available is steadily increasing. The top capabilities or information that you can use in controlling costs are:
- Utilization. Information on when and how assets are used can ensure the fleet is the right size, right type and is using the right fuel to operate efficiently. Eliminating, rotating or pooling lightly used assets can bring about significant savings. Shifting a fleet of SUVs to small sedans can save thousands of dollars per asset. Converting to an alternative fuel, such as electricity, will result in savings to operating costs. A utilization review is often the quickest route to cost reduction.
- Lifecycle costs. The optimum replacement point for every asset can be calculated where all capital and operating costs are known. When you remarket an asset at that point, you have ensured that the total costs associated with having owned that asset are minimized. Detailed costs data is key in determining when this optimum point is for each vehicle classification in your fleet.
- Maintenance productivity. Mechanic shortages and supply chain disruptions mean that both labour and replacement parts are more expensive. They also mean that repairs can be delayed, and the costs and operational degradation associated with downtime (idle crews) will be expensive for the organization. At the same time, many organizations are delaying replacement to ‘save’ money. That means the demand for maintenance increases even more. Having cost information can help drive staffing and outsourcing decisions and ensure needed maintenance activities take place to minimize costly downtime.
- Driver behaviour. Bad driving habits are costly to an organization. Speeding increasing fuel use and hard stops and starts can increase maintenance. Tracking this information gives organizations an opportunity to cut costs by training drivers in safe and eco-friendly driving practices.
There is absolutely no replacement for accurate data when it comes to fleet efficiencies. Acquiring the tools to capture this data will involve time and resources but will be well worth the effort invested.
The post-pandemic world
In addition to investing in technology, organizations can also take this time to get creative. With COVID-19 hopefully waning, it is time to return to normal or decide what the post-pandemic normal looks like. Solutions that were never contemplated in the past may now be acceptable. Some things to consider:
- Encourage the use of mobility options such as ride-shares, rentals, public transportation, biking or walking as alternatives to vehicle ownership.
- Reimburse employees for the use of personal vehicles on company business.
- Consider sales to employees as a remarketing option with little administrative hassle and the best return.
- Incentivize drivers to save fuel. Train them in eco-driving, set a baseline and share the resultant savings.
- Buy used vehicles to replace those well past their optimum lifecycles.
A little creativity can result in a lot of savings. Overall, 2022 promises to be as challenging as the COVID-19 years have been, but with some real opportunities. Technology and creativity are the keys to meeting challenges head-on and achieving efficiencies in an industry where fleets are (almost) too costly to operate.