How To Make Data-Driven Equipment Fleet Decisions
By Ryan Perry
Acquiring the big iron needed to dig earth, move materials, and build and maintain water and wastewater infrastructure to keep it operational is not cheap. Equipment for dewatering, bypasses, filtration, and more are typically among the largest capital expenditures of municipalities and contractors. In today’s budget-conscious environment, operations and fleet management are increasingly charged with containing equipment costs and even generating a return on investment. No small feat, if you ask me.
Knowing the total cost of ownership (TCO) for each asset or asset class is critical to making strategic, data-driven fleet decisions that impact the bottom line. Those decisions include what brand to purchase, whether to purchase new or used, when to dispose of an asset for maximum ROI, and when to rent instead of own.
Operations and fleet managers may assume that owning makes more financial sense than renting, but in many cases those assumptions could be misguided. Visibility into TCO can pay off by helping organizations see, quantitatively, when renting is the smarter decision. TCO can show how much money they could save by avoiding the capital expenditure (CAPEX) of an equipment purchase as well as the costs of ongoing maintenance, transportation, and storage. Of course, cash that is subtracted from the CAPEX budget can be invested elsewhere.
Understanding TCO is the first step in lowering it. But TCO is not always an easy number to calculate, in large part because it includes maintenance and operation costs. Since those costs vary with use and operating environment, they are different for each company. Knowing the true costs requires historical data — preferably a minimum of six to nine months’ worth. Without that data, an entity is doing guesswork rather than an educated calculation.
Cloud-based fleet management software, used in conjunction with equipment telematics, and data generated from advanced fluid control systems are essential to having the numbers to crunch. Most modern fleet management solutions allow a company to view the costs associated with owning, operating, and maintaining a specific asset.
To calculate TCO, begin by adding up:
- The purchase price, including taxes
- The cost of insurance and extended warranties
- The cost of transporting the equipment from worksite to worksite
- Maintenance and repair costs, including parts, supplies, and labor
- Fuel and oil costs
- Storage costs
- Interest on financing
- Depreciation
For ongoing costs such as insurance, maintenance, and fuel, an organization needs to estimate how many years it plans to own the asset, then multiply the projected annual costs by that number.
Subtract any revenue expected from the sale of the unit at the end of its planned lifecycle to arrive at the TCO. To annualize the TCO, a municipality or contractor needs to divide the TCO amount by the number of years it plans to own the equipment. TCO, once it is known, can be used to refine lifecycle planning.
Of course, annual TCO is not fixed. The expense of depreciation slows over time; meanwhile, maintenance and repair costs change with usage hours and operating conditions and increase as a machine ages. For calculating maintenance costs, a preventive maintenance plan, administered through fleet management software, is critical. Organizations can use fleet management software to generate regular reports that reveal the cost curve for owning and operating the equipment to help pinpoint the best time to dispose of it.
Understanding whether a piece of equipment is profitable requires a second input, beyond TCO, and that is utilization. Fleet management software can provide visibility into utilization of each asset or asset type. Higher utilization means a lower cost per hour of use; the more a machine is used, the more value it is generating. On the flip side, underutilized assets, which typically include specialty equipment such as high head, large-diameter pumps, storage tanks, and specialty filtration equipment, may be good candidates for rental. While there are no hard and fast rules, it may be smart to assess units with a utilization of less than 50 percent as rental candidates since they spend much of the time idle.
To make a buy vs. rent comparison, look at the annualized TCO compared to the cost of renting the same unit for the number of days or weeks per year the equipment is used. Do not look only at hours of usage per year; even if an organization uses an asset for a small number of hours per year, if the equipment is used almost daily, it is essential and should probably be owned.
TCO is not just a number — it is an important piece of data that can unlock value. Taken together, TCO and utilization are essential to developing a comprehensive fleet strategy that helps municipalities and contractors achieve annual budget goals and lower fleet costs. A strategy that provides a roadmap to make smarter decisions around what equipment to purchase, when to sell assets, and when to rent instead of own.
Ryan Perry is the Northeast District Sales Manager with the Fluid Solutions division of United Rentals. Ryan can be reached at rperry1@ur.com.