Tips For Lowering Your Material Handling
Total Cost Of Ownership
[GUEST COLUMN] Theo Rennenberg
Just about every company that finances its material handling equipment has, at one time or another, been charged overtime at the end of a lease or forced to
keep equipment with escalating maintenance costs due to
improperly structured finance contracts. If your organization has been immune to these aggravations, consider
Why is this such a common occurrence? Oftentimes, it’s
because the operations and finance teams are not working together to effectively manage their fleet. It is no
secret that these two departments have different perspectives and priorities, but the total cost of operation (TCO)
of your fleet is dependent upon a continuous dialogue
between them. They need to communicate regularly
regarding the ‘health’ of the fleet, which can only be
determined by combining financial information with
usage data and maintenance records. By analyzing this
information together, organizations are better equipped
to maximize their TCO.
Get Rid Of The Guesswork
The foundation of TCO/fleet management is the
structuring of a lease by estimating the expected annual
usage of the asset. Unfortunately, this process has always
been a guessing game. At my company, DLL, our independent analysis of meter reads at end of term revealed
that usage estimations are wrong 89 percent of the time.
That means that nine times out of ten, material handling
equipment is either over- or underutilized compared to
the lease allowances. When equipment is underutilized,
it means the monthly payment is higher than it needs to
be. And when it is overutilized, it means hefty overtime
charges at the end of the contract.
It’s easy to understand how this happens when you
consider the conflicting motivations of the stakeholders
involved in structuring a lease contract. Operations teams
typically dislike overtime and request more contract
hours than they need in order to avoid surprises at the
end of term. Finance teams, on the other hand, are often
focused on negotiating the lowest monthly payment and
are later shielded from the mid- and end-of-term results
of their choices (i.e., little or no in-term flexibility, restrictive and costly return conditions, high overtime fees, little
or no end-of-term flexibility for extensions).
What does this mean for your business as a whole?
Ultimately, it means a more expensive fleet to operate
when you consider the ‘total’ cost of operation. In order
to guard your organization against the pitfalls of this
guessing game, ask yourself the following questions:
1. Do you pull quarterly or annual meter reads to monitor the utilization of your fleet?
2. Do you regularly compare actual utilization data with
lease contract allowances?
3. Do you base your decisions to return equipment on the
condition of the asset rather than the expiration date
of the lease?
If you responded ‘no’ to any of these questions, your
organization may have lost sight of one of the most
important and impactful aspects of fleet management —
leveraging data to maximize utilization.
Leverage Data To Make Smarter Decisions
A collaborative relationship between operations and finance is not only important upfront when lease contracts
are being structured, but throughout the entire lifecycle
of the assets as well. By monitoring actual usage data and
regularly comparing it to the lease contract data, organizations are able to make critical decisions that can help
lower the TCO of their fleet.
Take, for example, a fleet of forklifts that is leased for
five years based on an estimated usage of 2,000 hours per
year ( 10,000 contract hours). Halfway through the con-