Tackling TCO

Feb. 10, 2014
Data-driven total cost of operation metrics touted for trucking

Total cost of operation, or TCO, calculations are not new to trucking. They’ve been used in one form or another for most of the industry’s existence as a way to determine the costs associated with operating individual pieces of equipment.  Sandeep Kar, global director of Commercial Vehicle Research at research and consulting firm Frost & Sullivan, explains that within the past five years, TCO has made a strong comeback as fleets and OEMs have tried to regain their grip on overall costs that was lost to some extent during the devastating fiscal impact of the Great Recession.

“TCO is a calculation that’s been around for a long time but really came back into stronger focus for fleets as repair and maintenance costs have become bigger concerns,” he says.  “But OEMs are using it as well to push their vertical integration strategies.”

Friedrich Baumann, senior vice president-aftermarket for Daimler Trucks North America (DTNA), notes that DTNA’s ongoing push to revamp its aftermarket parts strategy for the U.S. trucking market is in recognition of the huge impact OEMs can have on customer TCO.

“About 50% of vehicle TCO is related to what an OEM can manage,” he points out.  “About 35% [of TCO] is related directly to fuel economy, with 15% related to parts, service and [vehicle] downtime.  That’s why all of our initiatives are designed to help customers better manage their TCO.”

Mike Hamilton, national vice president of financial services at Ameri­Quest Transportation Services, adds that while post-2010 emissions-compliant equipment is more expensive to buy and costs more to maintain, there can be fuel economy gains as well, a factor that can ultimately affect TCO-based results in a positive fashion.

“You can’t just look at utilization alone because adding in maintenance and fuel can make for different decisions in terms of whether to extend the unit’s life or replace it,” Hamilton explains.  “It’s the data used in the TCO calculation that really drives that decision.”

Dennis Cooke, president of fleet management solutions for Ryder System, agrees, noting that TCO now covers a wide assortment of factors, such as increased acquisition costs and maintenance expenses, training required to bring technicians up to speed for maintaining new technology, hours-of-service restrictions, and costs associated with retaining and recruiting drivers.

That data can also affect the asset ownership period as well, says Hamilton.  For example, he points to the experience of an AmeriQuest customer operating 500 leased tractors.

“Under their old TCO model, they used to replace [tractors] every 550,000 mi. so they would project a replacement date solely on the miles,” Hamilton notes.  “But now we add fuel and maintenance expenses into the equation. Now we’re seeing a variance in replacement cycles; instead of 550,000 mi., we may replace a unit at 450,000 mi. or maybe extend the life 100,000 mi. beyond the 550,000 mark based on the data we get back from the TCO model we use.”

Hamilton believes it’s really important to conduct a TCO review unit by unit, as operating parameters may vary depending on the unit’s application.

“You need to take ‘variance of operation’ into account,” he stresses.  “Take the route a unit operates on.  If you have a route with traffic, you’re going to get back poor fuel economy results.  Does that fuel economy data then drive replacement?  Whether the unit is a newer model or older, you’re going to get poor fuel economy results.  That’s why you sometimes can get a false-positive when plugging fuel economy data into TCO.”

Focus on particulars

Yet at the end of the day, he believes the key to using TCO is the data it provides on when best to replace equipment.  “You can’t look at the fleet average anymore or base replacement times off broad studies,” Hamilton says.  “If you haven’t done a true TCO analysis within the last several years, you are leaving money on the table.”

Joe Monteleone, with WheelTime Fleet Services, adds that plugging in more accurate maintenance expenses into TCO calculations represents another critical data point in terms of figuring out the optimal time for replacing equipment. Monteleone coordinates and develops fleet services packages and agreements for each of WheelTime’s fleet customers. “Knowing the proper time to dispose of the unit and get the best return from a resale perspective while keeping maintenance in line before the bell curve of higher costs take effect is the goal,” he explains.  “A solid preventive maintenance program gives [fleets] control of their maintenance cost by providing them visibility into service events and overall vehicle health.  The use of standardized, customer-specific operations brings consistency to a fleet’s maintenance practices, allowing it to expand the useful life of assets.”

Monteleone adds that all of his company’s repairs are coded using vehicle maintenance reporting standards in order to provide better data into the specifics of repairs, thus helping fleets with predictive maintenance and future truck spec’ing.  “This keeps overall maintenance costs down and allows the customer to buy the right asset for the correct application,” he says.

AmeriQuest’s Hamilton agrees, stressing that TCO must be based on what a particular fleet is doing.  “The past is no longer a predictor of the future because [truck] technology has changed and performance varies by the type of unit, its location and application,” he says.  “The ability to gather a lot of different information—even tire wear and accident data—can better inform fleets how to optimize the life of their equipment.”

Ryder’s Cooke adds that his company is also utilizing telematics to proactively pull post-2010 emissions-compliant trucks off the road for a repair before they break down.  “We’re also working closely with the OEMs sharing maintenance data, which results in improved component quality for future trucks,” he says.

Cooke also said that he hopes cost pressures will not continue to escalate at the same pace that they have over the last few years.  “The introduction of bulk DEF [diesel exhaust fluid] storage and dispensing, complex diagnostics platforms as well as DPF [diesel particulate filter] cleaning technologies will continue to be big hurdles for most any fleet,” he adds.

Front & center

Noel Perry, senior consultant with FTR Transportation Intelligence and president of research firm Transport Fundamentals, also emphasizes that while great strides in fuel economy occurred over the past two decades—since 1993, the TL sector’s fuel efficiency has jumped up 8.9%—overall trucking costs jumped 4% in the early 2000s and 8% between 2010-2011. These include higher equipment prices, rising driver pay scales, fuel costs, and regulatory costs. While costs were flat in 2012-2013, FTR is forecasting a 2% to 3% spike for 2014.

Ryder’s Cooke notes, though, that capturing and analyzing maintenance data—along with the better diagnostic data available from newer post-2010 trucks—is helping his company improve its PM program.  “Those improvements to PMs, in-shop diagnostic tools, and use of telematics will help to control TCO,” he believes.

While Frost & Sullivan’s Kar agrees, noting that repair and maintenance is in his words “the heart and soul” of  TCO today, fuel costs, the driver shortage, and technician shortage are “messing up” traditional lifecycle costing methods to a high degree.

“That’s why TCO is now front and center for both new and used trucks alike,” he explains.  “Improved productivity is directly related to TCO, even with older-model trucks.  Clearly, the integration of data and TCO calculations form the dominant value proposition for fleets.  Telematics is important for gathering that data; while it may seem too expensive to invest in telematics, if done right, it returns tremendous benefits.”

The bigger the fleet the higher potential for better analysis as it gets more “ownership” of data, explains Kar.  “The midsized and smaller fleets will have to rely more on OEMs and third parties to get the data they need for TCO calculations,” he notes.

Kar also stresses that the trailer should not be an afterthought where TCO calculations are concerned.  “Don’t forget about the trailer,” he says.  “Side skirts and other aerodynamic fuel-saving devices are lowering the TCO for trailer units.  It’s the small savings that add up.”

Fleets need to look closely at non-truck factors that could really impact TCO metrics in the very near future, he says.

“We forget we’ve lived with low-interest rates for years now,” Kar emphasizes.  “As the economy improves and interest rates go up, that’s going to directly affect the tractor-trailer [cost] portion of  TCO, though leasing can mitigate some of this.”

There’s a lot of talk about the needs of transportation infrastructure and how that may push up taxes and tolls, he explains, two more factors that could negatively affect TCO for fleets.

As the need for drivers begins to intersect with the burgeoning development of autonomous or driverless vehicle technology, TCO calculations could become more scrambled in the future for fleets.

“On the surface, this could seem to solve the driver shortage, but we must tread carefully here,” Kar warns.  “The big problem is the shortage of skilled younger drivers.  What 25 year old looking for a career would want to be a truck driver if, in 10 years, he’s replaced by an autonomous vehicle?  That’s why we’re really looking at a short-term crisis here.”

Kar adds that autonomous vehicles really are at least 10-15 years away and are really more focused on trucks that can go on autopilot with a driver present to stop the vehicle when needed.

“It’s still a controversial area though,” he stresses.  “Right now, TCO is 37% driver-related and drivers will need to be paid more; it’s long overdue and needed, but it will inflate TCO in the short term.  And we simply can’t do much with driverless technology right now. It’s not an overnight solution.”

About the Author

Sean Kilcarr | Editor in Chief

Sean previously reported and commented on trends affecting the many different strata of the trucking industry. Also be sure to visit Sean's blog Trucks at Work where he offers analysis on a variety of different topics inside the trucking industry.

Voice your opinion!

To join the conversation, and become an exclusive member of FleetOwner, create an account today!

Sponsored Recommendations

Leveraging telematics to get the most from insurance

Fleet owners are quickly adopting telematics as part of their risk mitigation strategy. Here’s why.

Reliable EV Charging Solution for Last-Mile Delivery Fleets

Selecting the right EV charging infrastructure and the right partner to best solve your needs are critical. Learn which solution PepsiCo is choosing to power their fleet and help...

Overcoming Common Roadblocks Associated with Fleet Electrification at Scale

Fleets in the United States, are increasingly transitioning from internal combustion engine vehicles to electric vehicles. While this shift presents challenges, there are strategies...

Report: The 2024 State of Heavy-Duty Repair

From capitalizing on the latest revenue trends to implementing strategic financial planning—this report serves as a roadmap for navigating the challenges and opportunities of ...