Looking at Leasing: One Fleet’s Experience

Dan Driscoll will tell you that, in the wholesale supply business, trucks don’t just provide a way to deliver goods to customers – they can make the difference between success and failure. “Customer service drives our business,” says Driscoll, chief financial officer for Reno-Nev.-based Western Nevada Supply Co. “Getting deliveries to a customer on time is crucial to sustaining our business. That

Dan Driscoll will tell you that, in the wholesale supply business, trucks don’t just provide a way to deliver goods to customers – they can make the difference between success and failure.

“Customer service drives our business,” says Driscoll, chief financial officer for Reno-Nev.-based Western Nevada Supply Co. “Getting deliveries to a customer on time is crucial to sustaining our business. That means we use our truck fleet as a competitive tool, to provide a valuable service to our customer. But if we drop the ball on a delivery, that affects the customer, too. That’s why our fleet operation can make or break our business.”

That concept of customer service has been a guiding principle at Western Nevada since its inception in 1964 – in fact, the company’s motto is “Business built on service.” As one of the largest plumbing supply wholesalers in the western United States, Western Nevada owned and maintained some 35 trucks – ranging from pickups to Class 8 tractor trailers – so it could provide guaranteed deliveries to its customers.

Yet owning and maintaining vehicles proved to be an expensive proposition in more ways than one, says Driscoll.

“We had a classic fleet setup,” he explains. “We’d owned the fleet forever and had our own maintenance shop to support it.”

To get the most out of what it paid for its trucks, Western Nevada tried to keep its trucks as long as possible – which increased the amount of downtime for repairs as the trucks aged.

That, in turn, affected the company’s ability to transport goods to its customers in a reliable and cost-conscious fashion.

“We were burdened with the cost of operating our own shop and stocking it with parts. But then we also had the ‘soft’ cost factor of downtime,” says Driscoll. “To justify ownership, we were running our trucks into the ground, and as they piled on the miles, our downtime problem grew worse. When our trucks were in the shop, we were letting our customers down and were not meeting their construction schedules. It was an unacceptable situation – and one hard to put a cost figure on.”

That’s why, in 1995, Western Nevada began to look at full-service leasing – to relieve itself of vehicle purchase and maintenance. The company worked with Paccar Leasing Corp.’s Sparks, Nev., branch to examine what benefits a full-service lease package might offer.

“We examined the cost of full-service leasing against what we were paying to keep our current fleet running and the numbers were clear,” says Driscoll. “Operating costs were decreased by 5% to 10% initially. But our primary concern in making the change was improved customer service through increased vehicle uptime.”

With its leased equipment receiving maintenance service at night in Paclease’s 24-hour Sparks facility, western Nevada’s trucks would be ready to roll the next morning.

There were other savings as well. “We are able to deduct the full cost of the lease on a monthly basis, rather than taking the cost of the truck and depreciating it,” Driscoll relates. “Also, we now have the advantage of predicting our operating costs, as we don’t have to worry about how the cost of emergency road service, vehicle rentals, and other stop-gap measures will affect our fleet expenses.”

The Leasing Option

Western Nevada is not alone in its use of leasing to attain the twin goal of cutting costs while improving customer service. Indeed, the use of leasing throughout the U.S. economy jumped 13% in 1999, climbing to $234 billion from $207 billion in 1998, according to the Equipment Leasing Association of America (ELA).

Based in Arlington, Va., ELA is a nonprofit organization representing 800 companies. It estimates some 30% of the business equipment in the U.S. – everything from trucks and trailers to computers, construction equipment, and medical systems – is leased.

According to data from ELA’s State of the Industry Report, the two fastest-growing leasing markets are for transportation and technology equipment. Over 38% of the leasing industry’s business in 1998 came from the transportation market – including items such as aircraft, rail cars and buses, as well as trucks and trailers. Some 16.5% of all trucks and trailers are leased, up from 13.5% in 1997.

However, that percentage is predicted to increase substantially, as rapid technology improvements to trucks and trailers shortens their effective lifespan, says Ralph Petta, ELA’s director of communications.

“The rapid rate of obsolescence will encourage more companies to lease, rather than purchase, what may soon be outdated equipment,” he states. “Leasing used to be the last alternative for companies short on capital or constrained by cash flow. Now, businesses large and small are doing it as a strategy not only to put cash to other uses, but also to preclude taking on more debt and remain more flexible in the face of market changes.”

In trucking, small fleets and private carriers – companies with fleets such as Western Nevada whose primary business is not in trucking – are the core customers for leased equipment. According to industry statistics, some 67% of the commercial leasing market is made up of fleets with between four and 24 vehicles.

Minnesota-based GE Capital found that fleets with 150 vehicles or fewer make up 25% of its leasing business and represent 86% of the commercial fleet market nationwide. In fact, small fleets are one of the fastest-growing segments of the commercial leasing market – a market that is predicted to top $46 billion in revenues in 2002, nearly double in size from 1998.

Private carriers, however, remain a driving force in the truck renting and leasing industry, because they have a core business other than trucking that requires investment capital. Today, 20% of all Class 8 and 10% of all Class 7 vehicles are leased, with 50% of all trucks used by private carriers under some sort of full-service lease arrangement, says Tim Henebry, executive vice president and general manager of Bellevue, Wash.-based Paccar Leasing.

“Private fleet managers today are faced with mandates to become more efficient with every dollar allocated to transportation,” he says. “And after every penny is trimmed, upper management will demand more reductions the following year.”

Henebry says the rising cost of trucking equipment, along with stricter emission and environmental regulations, may boost the use of leasing.

“Environmental and safety regulations will doubtlessly increase the price of equipment,” he explains. “For example, the proposed 2004 emissions restrictions will force radical modifications to existing diesel engine designs, adding about $5,000 to the cost of each engine.”

Maintenance facilities and truck wash bays will also have to install storm-water runoff and treatment systems, which could be cost prohibitive to some companies, Henebry points out.

“With increasing government regulations, the cost of technology – not to mention inflation – may convince a greater number of private fleet operators to outsource transportation,” he contends.

“We are good at wholesale distribution, not running a trucking fleet,” adds Western Nevada’s Driscoll. “We know how to use and abuse trucks, but our primary focus isn’t on them. We saw inefficiencies in our fleet operation and recognized solving them wasn’t our strong point. That’s why we looked at leasing.”

Servicing the Customer

At the heart of Western Nevada’s decision to forgo purchasing vehicles in favor of leasing is the concept of customer service. The company, founded 36 years ago by Jack Reviglio and the late Bill Higgins, believes that the service behind its products – not merely the products and prices themselves – is the key to attracting and retaining customers.

Western Nevada leases 38 vehicles – seven are Peterbilt Class 8 tractors, with the rest comprised of pickups and one-ton flatbed trucks. The company also pioneered the concept of job vans, trailers that act as mobile warehouses at a construction site. Western Nevada has 180 of these trailers and stages and re-stocks them for the duration of a job.

Some 80 people employed by Western Nevada perform transportation and logistics functions for the company, from driving trucks to working in its warehouses. Transportation and logistics functions are so critical to the organization that its 45-week internship program devotes 30% of its time to transportation-oriented functions such as outside shipping and receiving and yard service.

Driscoll, who joined the company seven years ago, says full-service leasing allows outsourcing some of the more expensive aspects of a trucking fleet – especially vehicle maintenance – while still retaining full operation control.

“The customer’s viewpoint never changes, whether you own or lease a vehicle,” he says. “The same people are driving them and unloading them.”

Leasing also allows the company to update its equipment far more rapidly, giving them an edge where “image” is concerned. “The customer sees a new quality vehicle all the time, instead of an older truck you are trying to push for another year.”

In the end, Western Nevada has found leasing provides a money-saving option, while boosting its ability to serve customers. “It’s an easy answer – with Paclease, we are saving money, certainly,” says Driscoll. “But more importantly, full-service leasing has saved us countless hours of downtime, which has allowed us to improve the service we offer the customer. It was a slam-dunk decision.”

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