What are the benefits of TCO analysis?
As with any business organization, cost reduction and efficiency are key objectives in year-to-year strategy. Fleet managers are actively aiming to keep costs at a minimum, especially with how quickly they can add up when dealing with high-value assets. In order to know where costs can be cut, it is essential to fully understand each vehicles’ total cost of ownership (TCO).
TCO is the sum of all costs associated with acquiring a vehicle and keeping it operating throughout its lifecycle. Of course, this makes TCO very subjective to a vehicle’s projected lifespan, as well as fluctuating factors like fuel costs and taxes.
Breaking down TCO
You might be tempted to take the quicker route and estimate your fleet’s TCO using another fleet’s data. Even if the fleet is similar in size and function, however, the numbers you get may be misleading. In addition to TCO being the sum of so many different components, each of these components can be subjective to each fleet depending on the vehicles’ functions, the quality of service they receive and the region in which they operate.
The most obvious cost contributing to TCO is the initial acquisition price, or the price paid for the vehicle itself. This can range drastically depending on the type of vehicle needed, accessibility of these vehicles and the amount needed. To keep this cost as low as possible, fleets can order vehicles in bulk directly from the manufacturer. If vehicles are leased, interest charges are included with this cost and paid monthly. If vehicles are purchased with a loan, an additional cost of capital will be included in TCO. Any costs for upfitting vehicles should also be considered within acquisition costs. This includes any aftermarket add-ons that your trucks will need, from ergonomic seating to telematics hardware, to get them ready for use.
Asset depreciation should also be factored in here, as it typically makes up about 30 percent of TCO for fleets. While vehicles start to depreciate from the moment they are driven off the lot, this doesn’t necessarily mean vehicles are worth $0 at the end of their predicted lifespan. Well-maintained vehicles can actually be valued at 20 percent of their purchase price after five years of use, and at 10 percent of their purchase price after 10 years. This is important to note when weighing a vehicles’ cost to your business against its potential resale value.
Servicing and maintenance
Vehicle maintenance is an inevitable cost that must be factored into TCO. Routine servicing is essential for avoiding unnecessary repairs or accidents on the road that will result in even higher costs and downtime. In addition to following a preventative maintenance schedule, historical vehicle data offers predictive insight into which parts or models are prone to failure. For example, a cheaper truck that is known to require more frequent maintenance might ultimately be the more expensive option and this is important for managers to keep in mind. Knowing a vehicles’ typical service schedule also helps managers to factor vehicle downtime into their total cost of ownership.
Fuel is a critical expense for fleets with ICE vehicles to consider, often amounting to over 60 percent of operating costs for heavy-duty fleets. Fuel prices can fluctuate dramatically and can also range widely in different states and regions, creating another consideration for fleets operating across multiple states. Where vehicles are fueled also plays a role in TCO, whether it occurs on-site or at a local gas station. While on-site fueling implies added infrastructure costs, it also provides the opportunity to negotiate a lower fuel price by bulk purchasing. Implementing telematics is useful for knowing exactly how much fuel is being used on average, which will give a more accurate estimate for your TCO.
Insurance and licensing
Another cost that must be factored into TCO is insurance, which is currently on the rise. Insurance for cars is less expensive, ranging up to $1,000 per year, with insurance for trucks costing upwards of $1,500 per year. Purchasing fleet insurance for fleets of over 10 vehicles typically results in a better deal and seamless renewal process for managers, saving time and money.
Licensing costs are also included in TCO, along with any administrative fees. This is an important part of fleet management as mistakes or license expirations can result in costly fines or vehicles being towed.
Is TCO of EVs any different?
While electric vehicles typically have higher acquisition costs, when looking at overall TCO they are often the cheaper option. This is due to the slashing of two major costs – fuel and maintenance. In fact, driving an EV for 200,000 miles can result in savings of over $8,000 in maintenance costs alone. According to the U.S. Office Of Energy Efficiency and Renewable Energy, ICEVs average 10.1 cents per mile for scheduled maintenance costs while EVs average 6.1 cents per mile. In terms of factoring in fuel cost, managers of EV fleets will take into account the local price of electricity and their preferred charging method.
One study compared the cost of filling up both ICEV and EV models of a compact crossover SUV. The study compared the prices of fueling these vehicles in 15 cities across the US, where electricity and gas rates ranged widely. Across all cities, the EV model was always significantly cheaper to charge at home. In Spokane, Washington where gas is expensive but electricity rates are low, drivers could see savings of $899 a year on fuel. Even in New York City, where both power and gasoline rates are high, the study projected savings of $428 over a year.
However, EV drivers will more than likely have to fuel up on the road in addition to at-home charging. Unlike at-home charging, fast charging at public stations is almost always more expensive than your gasoline-equivalent. In Spokane, the price to fill up with gas versus electric charging was $31.70 to $36.55, respectively, and in New York it was $28.05 to $36.55. Of course, just like fuel, prices of electricity can vary between regions, so this will need to be updated over time.
TCO of EVs is also different because fleets that electrify can take advantage of government incentives such as the Qualified Plug-In Electric Vehicle Tax Credit which grants fleets up to $7,500 in credit for each EV acquired. This can result in massive savings, partially offsetting the higher acquisition costs for EVs.
Why it matters?
Knowing what TCO is and what exactly goes into this magic number, why is it so important? There are a few ways that understanding TCO can allow fleet to operate efficiently. First, calculating your vehicles’ TCO accurately is important because models cannot be compared by their ticket price or monthly lease rate as these figures don’t represent the cost of owning and operating that vehicle. Once you’ve gotten a solid TCO calculation, you can break this figure down into cost-per-mile making it easy to compare the cost-efficiency of models and compare your fleet to others using a normalized metric.
Understanding the TCO of each of your vehicles is a necessary step before being able to strategize cost reduction. With medium- and heavy-duty trucks being such high-value assets, understanding the costs and value of these assets is crucial when making financial decisions. You can finance these high-value assets better by accurately charging operators for the true cost of using equipment instead of going off of rough estimation.
Regularly reevaluating these individual contributing costs is also useful for measuring changes and adjusting TCO accordingly over time. An accurate, up-to-date calculation of TCO is essential for understanding the economic lifecycle of your equipment and informing replacement decisions. As vehicle costs increase the longer they are in service, TCO helps managers decide at what point they aren’t worth the money for maintaining them anymore. At this point, managers can cut their losses by selling the vehicle for parts and finally replacing with a newer model.
All in all, the more effort put into gauging the most accurate TCO, the more beneficial it can be for your operations strategy. While the estimate might change over time as costs fluctuate, having a dedicated team to stay on top of these changes will reap the most rewards and cost reductions for your fleet.
If you’re interested in learning more about TCO and how analyzing telematics data can provide you with the most accurate figures, schedule a demo with a member of our analytics team today.