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June 27, 2016 4:00 AM, EDT
Opinion: Pre-buying Could Cost Fleets in the Long Run

This Opinion piece appears in the June 27 print edition of Transport Topics. Click here to subscribe today.

By Patrick Gaskins

Senior Vice President

AmeriQuest Transportation Services

The trucking industry is notorious for pre-buying trucks before each Environmental Protection Agency-mandated change in heavy-truck engines. Many fleets do so because they are concerned about the reliability of the new technology, or they are trying to avoid the increased cost of new technology. Both are valid concerns.

Unlike Phase 1 of the greenhouse-gas regulations, which was more concerned with fuel consumption, Phase 2 focuses on the reduction of CO2. And the only way manufacturers can reduce CO2 is to reduce the amount of fuel burned per mile.

Fleets should depart from the usual pre-buy frenzy, stick to their normal trade cycles and follow what their asset data tells them is the most efficient plan. This plan will allow fleets to implement consistent year-over-year replacement plans and make only minor adjustments to achieve major cost savings.

Spikes in asset purchases due to a pre-buying have negative effects that will be felt for years to come. The end result is continued spikes in capital requirements, provoking pushback from a company’s finance and treasury departments.

With a pre-buy, fleet operators will spend significantly more money on assets than they would in a typical year and, in some cases, replace assets earlier than they typically would — or should. In the year after the pre-buy, there would be no need to replace additional assets because the majority of the fleet would be new. So the buying cycle becomes one of extremes: One year a company buys many trucks, the next year, none, making budgeting and cash management very difficult.

When the decision is made to alter the replacement cycle of assets, fleet executives need to consider the future capital expenditure repercussions. If the fleet doesn’t have the cash or credit availability for the spike in purchasing, it will be necessary to conduct business with an aging fleet.

The older fleet now needs additional maintenance, which may require additional technicians. Not only are qualified technicians difficult to find these days, but they are also very expensive.

In the primary years, operating costs for new assets are low. As assets age, they become more expensive to operate. If there is a large group in one model year, they age at the same rate, creating issues with maintenance and productivity in the later years. We see this exact scenario play itself out with many fleets and, ultimately, it becomes difficult — and sometimes impossible — to correct this dysfunctional buying cycle.

When considering asset replacement, it’s important to compare:

• Upfront cost of the equipment

• Utilization

• Historical and projected trends in maintenance and repair costs

• Fuel cost

• Current and projected fuel economy

• Fixed financing costs

• Used equipment prices

Financing flexibility is the key to managing the life cycle of an asset, basing fleet replacement decisions on what the current operating data indicate and what is the most cost-effective solution. Replacing some units each year is usually more cost-effective than dealing with gaps in fleet purchasing that occur when too many units are replaced at one time.

Fleets need to ease into new technologies. If the new trucks provide quantifiable cost savings, those savings can be evaluated in the next asset replacement analysis to determine if minor changes in asset life cycle would be of continued benefit to the fleet.

During a pre-buy year, the used-truck market will be flooded with older equipment. A depressed market is not a good time to unload vehicles that are still performing well. With the proper financing program, a fleet can extend the life of top performing assets and replace underperforming assets. This will alleviate the need to dispose of equipment in a depressed used-truck market.

A balanced purchasing approach would seem to be the order of the day. Buying too many assets in one production run also can expose a fleet to recall and problematic component issues.

I can think of at least three incidents when truck recalls were instituted (voluntary or mandated) in recent years.

Each of those trucks had to be taken out of service during the repair. This unplanned downtime adds to the vehicle’s total cost of ownership, not to mention the effects it has on fleet logistics and delivery schedules.

Consistent year-over-year fleet replacements and continual fleet planning allow the fleet to avoid all of the inconsistencies and added costs associated with holding on to older trucks. Also, new technology needs to be adapted and tested in the normal course of business.

A consistent year-over-year purchasing cycle helps you maintain a more consistent year-over-year operating and fixed financing budget. This approach will allow you to retain productive assets longer and replace unproductive assets earlier. Making incremental changes in asset life cycles will lead to significant and sustained savings overall.

Gaskins is the senior vice president responsible for financial services at AmeriQuest, which is based in Cherry Hill, New Jersey, and delivers comprehensive fleet management solutions that enable companies to reduce costs, optimize productivity and be more competitive in their markets.