Truck procurement has been a major challenge for private fleets, for-hire carriers and organizations that rely on trucking across many industries, including manufacturing, environmental, construction, and retail. This issue has been accentuated by the backlog of orders for Class-8 heavy-duty trucks - largely stemming from an American economy that has been healthy and robust since the Great Recession ended in 2010 - and a dilapidated industry philosophy toward truck procurement. But this is now changing.
Class-8 truck orders and sales continued at a steady pace through much of 2018, as many companies saw the need to upgrade into newer equipment or add to their equipment in order to handle the added demand in shipping goods. According to ACT Research, Class-8 net orders calculated 506,300 units at the end of November, the second-strongest 12-month order period in history, trailing only the 12-month period ending in October.
Monthly orders (28,082) still overtake the number of units being built (27,973) as of November, and while this fissure is narrowing it continues to show high demand for new trucks.
Organizations - particularly environment and natural resource brands - will continue to feel the effects of an order backlog into 2019 if they continue their asset attainment strategy based on “functional obsolescence” as opposed to “economic obsolescence.”
When environmental companies drive their trucks as long as possible, they operate on functional obsolescence - making conclusions based on the truck’s ability to stay on the road. In most cases, when firms let the truck decree the timetable for replacement, they are left scrambling to order a new truck based off limited planning cycles. The multiplier effect of so many transportation firms operating in this manner has led to today’s backlog of truck orders .
Companies that shorten their asset administration lifecycles by using an adaptable lease model will be able to plan their replacements better and thus avoid the agony associated with the current backlog.
The animated economy means that additional companies are shipping supplies to job sites or commodities across the country, more businesses need re-stocking shelves and inventory, and more consumers need goods which they order online and thus must be shipped. As a result, trucks are working tirelessly.
Because trucks and transportation have been the lifeline of this economic engine, replacement and truck obtainment strategies that help the economy stay active need to be carefully considered, especially as we begin 2019 and companies are taking a closer look at their bottom lines.
The long-standing business practice was for organizations to make purchase orders of trucks en masse, while driving them for anywhere between five and ten years of service, or even longer, to squeeze every nickel and dime out of the truck’s usage. However, data and analytics are proving this model to be expensive and unproductive. Instead, private fleets and for-hire carriers are realizing they can achieve more savings on the truck’s overall impact to the bottom line, as well as maintenance and repair (M&R) - the highest variable and volatile cost of a fleet operation - by moving to a shorter lifecycle.
Organizations are now paying closer attention to a truck’s individual “tipping point,” which we use to describe the point at which it costs more to operate a truck than it does to replace it with a newer model. Factors such as the cost of fuel, utilization, finance costs, and M&R are all factored into arriving at each truck’s unique tipping point, giving fleet operations employees and finance departments a closer look, based on data and analytics, at the optimum time to replace an aging truck.
As an example, a recent analysis of long-term ownership versus 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 approximately $27,893 per truck in comparison to a seven-year ownership model because of 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 typical savings of $12,710.
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 is especially effective with today’s fluctuating demand and the current booming economy as corporations are faced with equipment shortages and long lead times. This approach offers flexibility to accommodate changing markets, ultimately driving down functioning costs while strengthening the corporate image, driver recruitment, and preservation efforts by continuously upgrading to newer trucks.
Just as important, recent alterations to the corporate tax rate, as well as new accounting standards, have made it more appealing to lease equipment. With these alterations, at least in the case of truck acquisition, purchase of equipment remains pricier compared with shorter-term leasing of the equipment. What’s more, leasing continues to be the preferred method for companies regardless of whether they have a stronger or weaker balance sheet.
By implementing this new mindset of shorter truck lifecycles, industry organizations and transportation companies will become better equipped to exchange their aging truck fleets in a more cost-efficient manner.
By Brian Holland, President and Chief Financial Officer, Fleet Advantage
