Tapping the Aftermarket: A Special Supplement to FLEET OWNER Magazine

Jan. 1, 2000
Managers can lower costs with aftermarket products and services - but they have to do their homework firstAs fleet managers continue to wrestle with the twin costs of purchasing parts and completing timely repairs for their vehicles, aftermarket suppliers are adding new services and products designed to help their customers rein in those operating costs.And even as it seeks a bigger share of the fleet

Managers can lower costs with aftermarket products and services - but they have to do their homework first

As fleet managers continue to wrestle with the twin costs of purchasing parts and completing timely repairs for their vehicles, aftermarket suppliers are adding new services and products designed to help their customers rein in those operating costs.

And even as it seeks a bigger share of the fleet parts-and-service dollar, the commercial vehicle aftermarket is undergoing large structural changes that underscore its growing strength.

Consider that the economic forecasters at Martin Labbe Associates estimate that by 2003, the parts aftermarket will have expanded - by nearly 16% since 1998 - to $11.8 billion.

To grab a piece of that lucrative - and growing - pie, many aftermarket suppliers are offering new products and services aimed specifically at helping fleets improve their maintenance operations.

Certainly, if aftermarket suppliers increase their customer focus, fleets will benefit. Toward that end, aftermarket suppliers are becoming more directly involved in fleet operations, which in turn can free trucking managers to pay more attention to their own customers: shippers and receivers.

The success of any business rests on the ability to both control costs and increase revenue. That's definitely the case when it comes to trucking. According to the American Trucking Assns. (ATA), the net profit margin of for-hire carriers in 1997 was just 2.85%. That suggests cost control must remain a constant mission for fleet management - and a target of opportunity for aftermarket suppliers.

Product and service requirements obtainable from the aftermarket vary from fleet to fleet. To take maximum advantage of what's being offered by outside vendors, fleet managers must understand how their specific operating environment influences maintenance requirements if they hope to lower operating costs.

When perusing aftermarket products and services to see what fits with their fleet, managers should consider how such key factors as purchasing behavior, number of vehicles, and area of operation influence their maintenance requirements.

Purchasing behavior The types of repair jobs performed are directly influenced by the fleet's equipment purchasing behavior. To evaluate this, consider these questions:

Do you purchase new or used equipment? Used truck owners are more likely to perform a major engine or drivetrain overhaul due to the miles rung up by the previous owner or owners. Such a vehicle will likely be out of the warranty period when the major overhaul is required.

Does your maintenance shop perform major overhauls or do you outsource these repairs? Major overhauls to an engine or drivetrain will not have a big impact on the development of maintenance management practices for new truck owners with a short trade cycle of less than five years. The engine and drivetrain are not likely to fail during their ownership. Should failure occur, warranty will cover the repair cost.

Purchase behavior, such as new vs. used, length of trade cycle, and warranty terms, plays an important role in the development of maintenance management practices.

Area of operation A fleet's area of operation (off-road, shorthaul, medium haul, or longhaul) will also influence maintenance management decisions. Shorthaul fleets are domiciled at the same location daily, giving maintenance personnel the opportunity to regularly inspect vehicles.

In a medium-haul application, vehicles will typically return at least weekly to home base so these trucks can also be inspected regularly. However, providing for emergency roadside service will be more important for medium-haul than shorthaul fleets.

Emergency roadside service has still greater importance to longhaul carriers due to distance and length of time away from home. Therefore, national parts coverage may be very important to longhaul fleets.

Fleet size The number of vehicles operated impacts the volume of repairs, which, of course, influences maintenance management decisions. Having a firm handle on repair volume enables managers to make the correct level of investment in personnel and equipment, including software and diagnostic tools. Bear in mind repair volume directly impacts the fixed cost per repair.

Factors such as fleet size, purchase behavior, and area of operation should be considered when developing or revising maintenance management practices. And these should always be viewed with an eye to lowering total operating costs - not just reducing maintenance costs.

Maintenance records When it comes to recordkeeping, there are no justifiable shortcuts. The key is to keep good records so maintenance costs can be measured and tracked accurately.

The data generated from these records will help two-fold. First, it can be used to draw correct and meaningful conclusions about maintenance management practices. Secondly, it can be used to determine the value of products and services offered by aftermarket suppliers.

It's not possible to benchmark maintenance operations against outside repair sources without the information needed to measure the efficiency of in-house operations. Data generated from maintenance records will also help identify problems in maintenance procedures before they become major cost drivers. And tracking maintenance expenses will make it possible to determine if changes have actually resulted in desired improvements.

Along with improving maintenance management practices, measuring maintenance costs will help in spec'ing truck and trailer components by how they impact maintenance expenses.

Purchasing a software program is often a prudent investment for effectively recording and analyzing maintenance expenses. No two truck operations are the same, so fleet managers should seek out the program that best meets their requirements.

In addition to the cost of the software, keep in mind the often-overlooked cost of operating and maintaining it. Larger fleets can afford the cost of a sophisticated software program because it can be spread out over many vehicles. If the analysis from a software program reduces operating costs per vehicle by $50, then the potential cost savings for a fleet of 100 trucks is $5,000 - as compared to $250 for a five-truck fleet.

Information contained in Fleet Owner's Aftermarket Monitor database implies that most fleets still perform some type of equipment maintenance, whether preventive inspections, minor repairs, or major overhauls.

This suggests that outsourcing all maintenance practices is not cost-effective for most fleets. The database also shows that maintenance procedures differ by fleet due to operational differences such as vocation, area of operation, fleet size, and equipment purchase behavior.

What's more, the Aftermarket Monitor indicates that fleet maintenance management practices are changing as aftermarket suppliers offer new products and services.

As a result, some maintenance procedures are being outsourced to aftermarket vendors. This is where keeping good maintenance records can help a fleet better manage its business. Benchmarking repair costs by type of repair allows fleet managers to confidently evaluate aftermarket service offerings.

Measuring repair costs Comparing fleet maintenance operations to outside suppliers requires accurate knowledge of maintenance costs.

Maintenance expenses should be expressed as the unit cost per type of repair job. By expressing maintenance expenses as a unit cost per type of repair, fleets may discover that some of their maintenance operations are very efficient. In this case, the fleet may not want to outsource those repairs. The Aftermarket Monitor database suggests fleets are mainly outsourcing inefficient repair jobs.

The first step in calculating maintenance expenses as a unit cost per type of repair job is to separate expenses into two groups, variable and fixed.

Fixed costs are largely related to overhead expenses of operating a maintenance facility. Fixed costs do not change in response to the number of repair jobs. Variable costs do change in relation to the number of repair jobs. For example, an increase in the number of brake repairs will increase total brake part costs as well as labor costs related to brake repairs.

Fixed costs must be broken down into a unit cost in order to estimate the total cost per repair job. And the unit cost per repair job cannot be accurately measured if the amount of fixed costs related to the repair job is not estimated.

One method for doing this is to take the total number of repair jobs performed by the fleet and divide that into total fixed costs related to maintenance operations (Equation 1). The outcome is the average amount of fixed costs consumed per repair job.

Equation #1 Fixed Cost Per Repair $ = Total Fixed Costs $ Total Number Of Repair Jobs

Total Number of Repair Jobs Another method, known as activity-based costing, requires the fleet to estimate the amount of fixed costs required per type of repair. For example, administrative personnel may spend more time on brake repairs than transmission repairs because of the volume of brake repairs. On the other hand, depreciation and technician training costs may be much higher for transmission repairs than for brake repairs.

The idea behind activity-based costing is to find the actual cost per type of repair. This requires estimating the amount of fixed cost consumed per type of repair. The activity-based cost method is more time-consuming than just taking the average fixed costs per repair job (Equation 1). The activity-based method, however, will give a clearer picture of maintenance management practices.

Fleets should weigh the additional cost of using the activity-based method against the projected savings from gaining a more accurate understanding of repair costs.

Below is an example of how activity-based costing can be used to measure fixed costs per brake repair (Equations 2 and 3):

Equation #2 Administrative Costs Related To Brake Repairs + Depreciation Expenses Related To Brake Repairs + Insurance Costs Related To Brake Repairs + Technician Training Costs Related To Brake Repairs = Total Fixed Costs Related To Brake Repairs

Equation #3 Fixed Costs Per Brake Repair = Total Fixed Costs Related to Brake Repairs Total Number Of Brake Repairs Total Number of Brake Repairs

To measure the total cost for a repair, variable costs per repair job must be estimated next. This is relatively easy compared to estimating fixed costs per repair job.

Variable costs are primarily made up of parts and labor costs related to a particular repair job (Equation #4). If technicians get paid different wage rates due to their skill levels, then the wage rate used should be related to skill level required for the repair job. This will more accurately measure fleet maintenance costs than using an average wage rate.

Equation #4 Per Unit Part Price $ + Labor Cost (Hourly Wage Rate x Number of Labor Hours) + Disposal Cost (if applicable) + Inventory Costs (related to that particular repair) = Variable Cost Per Type Of Repair

The total cost of a repair is equal to the fixed plus variable cost (Equation #5). By understanding repair costs by the amount of input required, fleets can begin to make decisions that will improve maintenance management practices. Fleets can change maintenance operations to lower repair costs or they can outsource repairs to an aftermarket provider.

Maintenance records provide fleets with the necessary information to make informed decisions on maintenance management practices. In addition, tracking maintenance expenses allows fleets to measure whether or not changes resulted in improvements to their maintenance operations.

Equation #5 Total Cost Per Repair $ = Fixed Cost Per Repair $ + Variable Costs Per Repair $

Oportunity Cost In addition to the actual cost of a repair, there is an opportunity cost. Opportunity cost is defined as the loss in revenue from a truck being out of service while undergoing repairs. In many instances, the opportunity cost exceeds the repair cost.

This implies that a low cost for a repair may not be cost-effective if it results in increased vehicle downtime. Remember, the fleet's goal should be developing maintenance management practices that lower total operating costs rather than just maintenance expenses.

The Fleet Owner Aftermarket Monitor shows that opportunity costs do indeed influence fleet repair and parts-sourcing decisions.

In selecting a repair source, many fleets place greater value on timely completion of a repair and the workmanship. The fleet wants the repair completed quickly to reduce downtime. In addition, the fleet wants the vehicle repaired properly to lower future downtime. In any event, vehicle downtime negatively impacts asset utilization, and, therefore, profitability.

Outsourcing parts inventory to a supplier may not be cost effective if the supplier cannot deliver parts when required. The reduction in inventory costs may be more than offset by lost revenues from an increase in equipment downtime.

The Fleet Owner Aftermarket Monitor database shows that fleets put a premium on availability when selecting a parts source. The database also shows that opportunity costs related to equipment downtime have a large influence on maintenance management practices.

In addition to influencing part and repair sources, opportunity costs also affect how a vehicle is repaired. To save downtime, many fleets and outside repair sources are switching from repairing failed components to replacing them.

But the switch to component replacement will increase the cost of parts related to the repair job. Purchasing a complete assembly is more expensive than purchasing the parts needed just to repair the failed assembly. (The complete assembly contains labor costs that a repair shop would have incurred when repairing the failed assembly.)

Replacing a failed component requires less time than repairing the failed assembly, thus reducing opportunity costs related to equipment downtime. This reduction in many cases more than offsets the higher cost for parts. In addition, replacing a failed component reduces labor costs because replacing a component takes fewer labor hours than repairing the failed part.

There are many ways to measure opportunity costs related to downtime because of differences in fleet operations. Some fleets may measure opportunity costs by driver overtime and the increase in vehicle operating expenses as other vehicles in the fleet take over the routes of the out-of-service vehicle.

Other fleets may measure downtime by the cost of renting a truck to temporarily replace the out-of-service vehicle. How to measure opportunity cost depends on the fleet's specific operations. Below is one example of how some fleets may measure opportunity costs related to downtime (Equation 6).

Equation 6 Downtime (measured in days) x Vehicle-Average Revenues Per Day, $ = Opportunity Cost

The purpose The purpose of developing a maintenance management program is to lower total operating costs, rather than simply cut maintenance expenses. Fleets should keep detailed records of operating expenses because the successful development of a maintenance management program rests on measuring and tracking costs.

Measuring costs helps fleet managers better understand their business, which in turn enables them to improve management decision-making.

Indeed, having hard data on hand enables managers to estimate with greater certainty how changes in maintenance management practices can impact overall fleet operations.

To accomplish this, vehicle costs must be tracked - not just measured - to see how changes in maintenance practices impact total operating cost. Remember, a successful maintenance management program will lower total fleet operating costs, rather than just minimize vehicle maintenance costs.

While developing or revising a maintenance management program, it pays to investigate the parts and service offerings aftermarket providers are putting on the table. But only by knowing fleet costs first can fleets make valuable decisions about outsourcing portions of the program to aftermarket firms.

About the Author

Martin Labbe

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