With pressure on to reduce costs and capital spending in logistics, shedding assets sounds like a quick fix. There are options to consider for vehicle fleets, one of the more capital-intensive logistics assets.
Truck and engine manufacturers have introduced numerous innovations in new truck models responding to ever-changing environmental regulations and the need to reduce the greenhouse gases that contribute to global warming. Volatile prices for diesel fuel that reached record levels in 2008 is also driving equipment manufacturers to provide new technologies that maximize driver productivity and fuel economy.
The complexities of choosing and servicing these new truck technologies, and balancing them with the company's transportation needs, can be challenging.
Vehicle leasing can be a crucial strategy in accomplishing transportation goals while taking advantage of the emerging technologies that have been advancing in shorter and shorter design and implementation cycles.
Before making the decision to lease or buy a new piece of equipment, here are five questions you should ask:
What is the best use of your company's capital?
Every company is different. Depending on whether your company is privately or publicly held, how it's capitalized and how it measures the success of business activities will determine the best use of its capital.
Companies finance their business activities through equity and debt. Financial decision makers (chief financial officers, vice-presidents of finance, etc.) spend much of their time ensuring that their companies leverage borrowing power (debt) and equity (retained earnings/stockholders equity) in a balanced manner to get the highest return possible.
When buying new equipment that depreciates, most organizations seek to gain at least some minimum amount of return on their investment. That's why financial decision makers will evaluate whether the investment in equipment offers a return higher than their “hurdle rate.” That rate is usually defined as the company's weighted average cost of capital plus a nominal premium. If they determine the equipment does not offer a return that's higher than the hurdle rate, then leasing may offer an alternative. Additionally, many financial decision makers will perform a net present value analysis of the lease or loan payment stream, which allows them to review the payments in today's dollar value.
When considering a lease or purchase decision, it's important to conduct an ROI (return on the investment) calculation to determine whether your company should use equity or debt to finance the equipment. Lease accounting treatment, which falls into two main categories: on-balance sheet and off-balance sheet, can favorably impact a company's key financial ratios like ROA (return on assets) and ROI. If your company is measured on a key financial ratio favorably impacted by lease accounting treatment, you should take this into consideration.
Most leasing companies can assist with the ROI analysis.
Is transportation a core competency?
Companies must ask, are we a trucking outfit or are we in another line of business? Many organizations have determined that by leasing their trucks and assigning their maintenance, roadside service, fuel tax reporting, and other administrative headaches to leasing companies, they can focus their employees' and managers' energies on activities central to their business. When employees and managers concentrate on delivering products, they can provide top-notch service and on-time performance to their customers. They also have time for customer-facing activities that help gain new business.
For many companies, investing time and resources in trucking related activity can be a slippery slope. Specifying the right equipment for trucks and handling maintenance requires the right knowledge. Transportation managers must keep up with the latest developments in trucking technology. Maintenance facilities must be properly equipped and staffed with well-trained technicians.
By outsourcing non-core functions related to trucking through a full-service lease, companies can use employee drivers while taking advantage of the leasing provider's equipment know-how plus equipment buying power and expertise.
Due to their sheer size, leasing companies can negotiate the best pricing on equipment, maintenance items and expendables and pass those economies of scale to customers. Without that benefit, a smaller fleet with fewer than 50 units can expect to pay a sizeable premium on parts, tires, outside repairs and other truck-related expenses due to economies of scale.
Leasing companies can also customize trucks with specialized equipment to meet individual client needs and help you realize operational efficiencies such as better fuel economy, greater productivity, and improved driver satisfaction.
Do you know the true cost of ownership?
More specifically, do you know equipment maintenance costs? Most organizations have a good handle on their financing costs — equipment financing is fixed. Unfortunately, the cost of maintenance is often not well known or understood. But it should be.
Large fleet operators can tell you down to the penny, on a unit-by-unit basis, how much they spend on labor, parts, tires and outside repairs for their trucks. They can also tell you how those expenses are trending compared to their annual budgets. Think of this as a profit-and-loss statement on each truck. Those companies can also track trends that indicate poorly running units and units that experience repeat repairs. These trends influence future component purchasing and maintenance practices. Trends also help guide organizations to make replacement cycle decisions. By watching how these costs are tracking, organizations can fine-tune their trade cycles and optimize their operating costs.
Unsure how to capture true maintenance costs for your trucks? You can purchase off-the-shelf software to help calculate this data. But the software usually can't take into account your parts and labor pricing. Plus, off-the-shelf software that tracks expenses doesn't usually take into account the administrative costs associated with managing a fleet. The time it takes to process repair orders, payables and receivables, plus track warranty work, licensing, permitting and compliance with US Dept. of Transportation regulations, can add up. Those expenses may or may not be captured at the fleet or unit level. These items, traditionally thought of as overhead items, contribute to the overall cost of ownership and must be considered when deciding whether to lease or buy trucks.
What information do you need to make a lease/own comparison?
There are 12 basic items or costs you need to identify to perform an accurate comparison — seven for ownership and five for leasing.
Initial cost of equipment: the original purchase price, including taxes, and additional equipment such as van bodies, tool boxes, auxiliary power units, refrigeration units, etc.;
Interest rate if considering a bank loan, length of loan and down payment;
Length of asset life — how long will you utilize the equipment;
Corporate tax rate — used to determine your company's net, after-tax benefits of depreciation write-off;
Maintenance costs over the equipment's life;
Administrative costs for licensing and tracking DOT compliance, plus the general and administrative costs associated with managing fleet maintenance;
Net present value calculation of the monthly payments, finance cost, and maintenance cost over the equipment's lifetime.
Variable cost (mileage rate) if a full-service lease;
Length of lease;
Net present value calculation of the lease payments over the equipment's lifetime;
Residual responsibility — is it yours or does it belong to the lessor?
Again, it's vital to tally all associated administrative expenses under ownership and lease before making comparisons. Once the data are gathered, you can perform a net present value calculation on the lease payment, the finance cost and the maintenance cost over the equipment's lifetime. It's also important to look at the net after-tax cash flows under ownership and leasing. This will give you the true picture of how depreciation impacts ownership and leasing cash flows. The net present value calculation will estimate the future cash flows of ownership and leasing in today's dollars so you can make an informed financial decision.
What are the perceived benefits of ownership and leasing?
The benefits of leasing trucks are financial and operational. Financially, a company can preserve capital for other parts of its business that generate a higher return. Operationally, it allows a company to focus on core functions of its business.
Truck ownership has been perceived to provide better control, which may or may not be the case. In many situations, there is inherent risk associated with owning trucks. Some of these risks include the value of the equipment at trade-in time, unpredictable maintenance costs over the equipment life, obsolete or stranded assets due to improper replacement cycle and increased costs caused by hiring, training and tooling technicians to keep up with ever-changing truck technology. Those risks can make it difficult to maintain a stable cash flow. Equipment failures, even when they're covered under warranty, can create delivery delays and adversely affect your company's income.
Often, leasing can provide considerable flexibility to meet short-term and long-term equipment needs by custom tailoring a lease and maintenance package that matches the truck's useful life. A leasing company can, in many cases, offer a lower monthly payment than what you would pay to finance a truck since it uses the truck's residual value in determining the lease payment. Some leasing companies offer substitute vehicle programs that can provide comparably equipped replacement units while your trucks are being serviced.
With the data to perform a cost-benefit analysis on the options of leasing or buying fleet equipment, it will be easier to make the decision that best fits your productivity, customer service and financial goals whether the overall economy is trending up or down.
Olen Hunter is director of sales for Bellevue, WA-based PACCAR Leasing Company (PacLease). He has 16 years of full service leasing experience. PacLease has 328 independent and company-owned full-service leasing locations throughout the United States, Canada, Mexico, and Germany.