Fleetowner 5169 Tradecycleopener

Fine-tuning trade cycles

April 8, 2015
The devil is in the details—and the funding

An equipment trade-cycle plan should be more a science than an art, but talking to experts in fleet management, equipment evaluation, and maintenance, that science would seem to be an inexact one. Indeed, ideas on the subject are as varied as trucking operations themselves. Is the key factor a detailed accounting of operating costs? Understanding the impact of ever-improving truck fuel efficiency? Keeping drivers happy? Letting the banker win at golf?

All of the above, it turns out.

Fleet Advantage CEO John Flynn has developed a formula for what he terms as “a self-funding approach.”

“If you have a decent capital base—meaning you’re not under-capitalized and you have some capacity to take on debt of leases—what’s really happening now is the fuel economy on new equipment is getting so much better year after year,” Flynn said. “So when you can get out at year three or four, new equipment pays for itself.”

The math is straightforward, as Flynn explains it: An improvement in fuel economy of just one-half mile per gallon will save between $300 and $400 per month, based on 100,000 mi. per year for the truck. And that easily covers the higher cost of the new equipment.

And new trucks come with new tires and a full warranty, so maintenance costs will be reduced as well. Instead of paying 8¢ to 10¢ per mile to maintain a four-year-old tractor, buying or leasing new resets those costs to 1¢ to 2¢.

“For me, there’s not much to debate—as long as you have a strong enough balance sheet to withstand the acquisition,” Flynn says.

Ay, there’s the rub. The operating cost “is not the whole picture.”  Indeed, the measure is typically only a small part of the decision-making process, says Darry Stuart, president and CEO of DWS Fleet Management Services.

“Every single trade cycle is a math equation,” Stuart says. “But it is truly a formula based on the ability to have funding. If the fleet is four or five years old, and the company hasn’t had a good financial year, and the residual isn’t right, and the price of the new truck isn’t right, then there’s a good chance they’re going to keep those trucks another year.”

It’s when those pieces of the equation all fit that a company will look at the operating cost of the vehicle, Stuart notes, and even then, “the problem with the operating cost is that most fleets don’t have the details necessary to measure it.”

"If the fleet is four or five years old, and the company hasn’t had a good financial year, and the residual isn’t right, and the price of the new truck isn’t right, then there’s a good chance they’re going to keep those trucks another year."

—Darry Stuart, president and CEO of DWS Fleet Management Services

With more than 40 years in transportation to draw upon, Stuart says the typical fleet is about 80% accurate in assessing cost per mile. Additionally, most companies don’t try to project that cost into the future.

Of course, the company accountant has to be involved: Depreciation schedules and tax implications are key parts of the equation as well, basically pushing the operating cost well down the list, Stuart explains. Indeed, the accountant is more involved in trade-cycle strategies than the maintenance manager, in Stuart’s experience. “Most places don’t even talk to the shop,” he says.

And he concedes some people may not agree with him.

“There’s no question you’ll have hockey stick operating costs; your cost per mile will increase,” he says. “But if the price isn’t right or you can’t get the financing, it’s easier to justify the higher maintenance costs than to take on the burden of the price of a new truck.”

Holding on to a piece of equipment beyond its depreciation schedule can be cost-effective. “If you don’t have depreciation and a payment, you can afford an operating cost and maintenance that’s higher than normal,” Stuart says. “At the end of the day, it’s the total cost of operating the truck.”
Fleet Advantage’s Flynn, however, sees a paradigm shift in the boom-bust cycle of equipment purchases.

“I don’t think you can run your trucks that way anymore,” he says. When you break down the costs associated with maintenance, fuel economy-related items, depreciation and amortization, fuel, and finance charges, it really makes you focus on what’s more important.

“And if these manufacturers continue to bring up the fuel economy by 0.1 or 0.2 mpg every year, there’s not much of a question about whether you should upgrade,” he continues.

Discipline is critical, Flynn adds, and fleets that don’t pay attention—those that do not track fuel and maintenance costs and that do not ensure the equipment is properly calibrated and drivers are properly trained and incentivized—will not realize the full potential of the newer equipment. And that means those trucks are much more expensive.

But for fleets that “do all the things you’re supposed to do,” the math works.

“Instead of the functional obsolescence model, which is what people have been doing for years—they run the truck until they can no longer run it anymore—our model is based on economic obsolescence,” Flynn says. “When do you reach the tipping point? A piece of equipment that’s three, four, five years old certainly has a lasting life, but is it going to be economic to do it? The answer is, not usually.”

The current set of federal truck fuel efficiency standards guarantee that even further improvement is coming, Flynn adds, although it’s still up to the fleets to keep track.

Making smart decisions

“So you sit down with your banker or leasing company, and show them,” he says. “‘Hey, as much as I’m going to amortize this equipment with you over a six-year period, it looks like somewhere between three and four years there’s going to be an economic opportunity for me to improve my cash flow, reduce my operating expenses and increase my profit.’ For every banker, that’s music to his ears.”

But just because a company has the wherewithal to refresh its fleet doesn’t mean it needs to max out capital expenditures.

Patrick Gaskins, group vice president, Financial Services, for AmeriQuest Transportation Services, cautions against a sudden surge in new equipment and suggests that rapid shift in a fleet’s equipment age can lead to unanticipated problems.

The 2014 run-up in truck orders was a prime example of the industry’s boom-or-bust tendency, or “consistent inconsistency” as Gaskins characterizes it.

He advocates an asset replacement strategy that keeps the average age of equipment consistent. There are benefits to fleet aging such as spreading maintenance expenses more evenly.

“The benefits of an asset placement strategy that ensures fleets age evenly are many, including giving fleets a hedge against the current diesel mechanic shortage,” Gaskins says. “As newer vehicles are cycled regularly into a fleet, there is less need for the skills that experienced, highly trained technicians bring. The labor for maintenance is minimized and downtime is kept to a minimum. And as new technology is introduced into the fleet, technicians can learn to master it in a more controlled environment.”

Additionally, a moderate and regular replacement schedule means the company is less susceptible to swings in the resale market. And overall, “a strategic long-term, thoughtful approach” means more consistent and effective budgeting.

For Nashville-based truckload carrier Sharp Transport, a reorganization of the shop has provided the key to tremendous improvements in efficiency, as well as much greater insight into the true costs of running the company’s 100 trucks, explains Jarit Cornelius, the fleet’s director of maintenance.

“If you want to establish a true trade-cycle plan, the first order of business is to gain complete control of your everyday operating costs—for the life of the truck,” Cornelius says. “You can put the numbers together, but you’ve got to know how to use them for your benefit.”

Prior to Cornelius’s arrival and adoption of  VMRS coding to get shop costs under control, Sharp Transport had traded in trucks after five or six years—“because that was what we’d always done.”

“We just kind of set the financing up that way and let the chips fall,” he says. With improved visibility to the maintenance process, however, Cornelius was able to establish the operating costs for each make and year of Sharp’s mixed-brand fleet. The company’s trucks run between 115,000 and 125,000 mi. per year.

“I was trying to find a line in the sand: the cost for the first year for this truck, the second year, and so forth,” Cornelius says.

He broke out standard maintenance costs, looking for repair trends, and came up with 42 months as the point at which repair costs began to escalate. And he also gained valuable insight as to the best performing truck groups.

And that’s substantially changed the way Sharp buys its equipment.

“I’ve created a report for every single one of our trucks. I know the average cost per mile, year to date, for every single unit number in our fleet,” he says. “I’ve got my expectations for each OE, and when they come in and ask why I didn’t buy from them in my last order, I show them the costs and ask what we can do to get them down to a competitive level.”

As a result, Sharp has been able to negotiate lower purchase prices along with better parts and labor rates.

Looking at the bigger picture, trade cycles are impacted by issues outside the shop. Cornelius immediately cites the driver shortage. For instance, if a group of trucks is due to cycle out in June, replacement plans have to be made in April.

“But do we want to trade 10 for 10, or maybe just 10 for 5 because we haven’t been able to fill 5 trucks for the last three months,” Cornelius says. “So that’s a really big deal. It’s a gamble. Do we need to take on that financing? Trucks aren’t getting cheaper.”

Is there still value?

David Schaller, industry engagement manager for the North American Council for Freight Efficiency (NACFE), takes a slightly broader view of assessing operating costs: Essentially, does the fleet’s current equipment still get the job done?

While maintenance does come into play—in terms of impending major service work—he too argues that fuel efficiency and performance are critical. “Are you still operating the truck where you spec’d that truck to operate?” Schaller asks. “What generation of emissions technology is on the truck? Is the truck set up for downspeeding, or to run at low rpm? Is it geared appropriately for the fleet’s speed limit philosophy?”

And if the answer is no, trade-cycle plans likely need to be accelerated. NACFE’s equipment evaluation reports have detailed the advantages of idle reduction technologies and automated transmissions, for instance. “Plenty of fleets see the benefits of the newer vehicles,” Schaller says, although quantifying the impact on driver retention, for instance, along with the unknown residual value of new technologies make coming up with a trade-cycle formula “very difficult.”

“Driver turnover is one of the biggest issues, so it’s entirely likely that an AMT rise has occurred in the last buying cycle,” he adds. “Four years ago, AMTs weren’t nearly the force that they are now. Some of the early AMTs were not anywhere near the current generation for performance and reliability.”

The question of how well equipment specs fit a fleet’s operating profile has grown to include “the driver situation,” Schaller notes. “What sort of equipment do you need to recruit and retain good drivers? Do you have X, Y, and Z? If you don’t and somebody else does, your driver problem is only going to get worse. How do you calculate that in a trade-cycle plan?”

As with many things in trucking, there is no basic, industry-wide recipe for successful equipment cycle management. A fleet that runs sleepers over-the-road and relies on dealer service will have different needs than a local fleet that runs day cabs and does much of its service in-house.

“Everyone has a different financial picture, and everyone has a different interpretation of how to run their business,” Stuart says. “It comes down to how much the finance group wants to pay. You take the price of the piece of equipment, you divide it out, and that’s how many trucks you’re getting.”
Essentially, the trucking business is cyclical. “It’s not going to change,” he adds.

So, what’s the bottom line for managing fleet trade cycles? Essentially, fleets just need to have one. “It’s one thing to talk about tracking your cost per mile or identifying your trade cycle. But if management doesn’t see it or if they don’t want to do it, they’re not going to change,” Cornelius concludes. “But if you think you’re not losing money, I can promise you that you are.”

About the Author

Kevin Jones 1 | Editor

Kevin Jones has an odd fascination with the supply chain. As editor of American Trucker, he focuses on the critical role owner-ops and small fleets play in the economy, locally and globally. And he likes big trucks.

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