Above: Class-8 vehicle production is expected to continue its growth trend through 2019.

Metals supply chain can choose a different method to combat long lead times for new trucks and better control costs

April 2019 - Truck procurement has been a key challenge for private fleets, for-hire carriers and establishments that rely on trucking across many industries, including metal fabricators, welding, manufacturing, construction and retail. This challenge has been accentuated by the backlog of orders for Class 8 heavy-duty trucks, stemming mainly from an American economy that has been positive and resilient since the Great Recession ended in 2010, and an outmoded attitude toward truck procurement that is finally changing.

Class 8 production is expected to continue its growth trend through 2019, according to the North American Commercial Vehicle On-Highway Engine Outlook, published Feb. 27 by ACT Research, a Columbus, Indiana, consultancy. This follows a healthy rate of new orders and sales during much of 2018, as many companies upgraded to newer equipment or added to their equipment to handle amplified cargo volumes.

Data analytics are now helping companies determine the most cost-optimal time to replace fleet trucks.

Regarding heavy vehicle demand, “ACT’s Tractor Dashboard posted a third consecutive -5 reading in December, suggesting demand will increasingly come under pressure in the first half of 2019,” says Kenny Vieth, ACT president and senior analyst.

The heavy commercial vehicle market continues to benefit, however, from a still broad spectrum of supply- and demand-side triggers. “The rolling over of ACT’s Dashboard guidance suggests order weakness will transition from today’s ‘too much backlog’ to an equipment supply-freight demand imbalance in the near future.”

Obsolescence questions

Participants in the metals supply chain will continue to feel the effects of an order backlog this year if they continue their asset procurement strategy based on functional obsolescence versus economic obsolescence. Companies that shorten their asset managing life cycles based on an adaptable lease model will be able to plan their substitutions better and thus avoid the distress linked with truck manufacturers’ backlogs.

North American economic conditions compel more manufacturers to distribute supplies to job sites or goods across the country; more wholesalers and retailers need to restock shelves and inventory more quickly; more consumers want the goods they ordered online to be delivered as promised.

What that means is trucks are working tirelessly and transportation has been the backbone of this economic engine.

Replacement and truck procurement strategies that help the economy stay motivated need to be carefully measured, especially as companies review their bottom lines for the sake of planning over the next 12 months.

The established business philosophy was for organizations to make mass purchase orders of trucks and drive them for about five to 10 or more years of service, as a way to squeeze every dime out of the truck’s usage.

Fuel is a variable cost that can be reduced in the long term with the use of FleetAdvantage’s asset management tools.

However, data analytics are proving this standard to be costly and unproductive. Instead, private fleets and for-hire carriers are realizing they can attain more savings on the truck’s overall impact to the bottom line, as well as maintenance and repair (M&R)—the highest adaptable and volatile cost of a fleet operation—by transitioning to a shorter life cycle.

Staying on the road

While metals supply chain companies historically drove their fleets as long as they could, they operate on functional obsolescence—making decisions based on the truck’s ability to stay on the road. In most cases, when organizations let the truck command the timetable for replacement, they are often left struggling to order a new truck based off limited planning cycles. Today’s backlog of truck orders is a consequence of this, as the multiplier effect of many transportation firms and this attitude have caught up to them.

Instead, today’s leading corporations are using a different method. Organizations are now keeping a close eye on an individual truck’s tipping point, the point at which it costs more to operate a vehicle than it does to replace it with a newer model.

Aspects such as the cost of fuel, utilization, finance costs and M&R are all factored into each truck’s unique tipping point, giving fleet operations employees and finance departments a closer look based on analytics that will help them determine and possibly predict the optimal time to replace an aging truck.

As an example, an analysis of long-term ownership versus shorter life-span management, conducted by FleetAdvantage LLC, demonstrates a noteworthy cost savings over time. A fleet that opted for a four-year lease model on a truck would save about $27,893 per truck in comparison to a seven-year ownership model, when considering variables such as fuel, utilization, financing and M&R. The shorter lease model is also cost-effective when linked to just a four-year ownership model, showing common savings of $12,710.

Attractive analytics

This method offers flexibility to adapt to changing markets, ultimately driving down functioning costs while strengthening the corporate brand and driver recruitment and preservation efforts by constantly upgrading to newer trucks. Corporations are leveraging data analytics and inclusive fleet studies that produce a fleet modernization and utilization plan, projecting when aging equipment will need to be replaced.

This is efficient in light of fluctuating demand within a dynamic economy because companies that want to acquire equipment based exclusively on cargo demands may face equipment shortages and long lead times.

Just as significant, alterations to the corporate tax rate, as well as new accounting standards, have made it more appealing to lease equipment. With these changes, at least in the case of truck acquisition, the outright purchase of equipment remains pricier compared with shorter-term leasing of the same equipment. Leasing has become the favored method for countless companies regardless of whether they have a strong or weak balance sheet. In addition, leasing also allows companies to avoid the risk of residual value and the expense of remarketing.    

By implementing this new outlook of shorter truck life spans, the metals supply chain and the transportation companies that serve it will become better equipped at replacing their aging truck fleets in a more effective manner. MM

Brian Holland is president and CFO of FleetAdvantage, which provides truck fleet business analytics, equipment financing and life cycle cost management.