Reducing Truck Order Backlog
A new approach to truck attainment and replacement
By Brian Holland
As evidenced by a backlog of orders for Class-8 heavy-duty trucks, truck attainment has been a major challenge for private fleets, for-hire carriers and associations that rely on trucking across many industries, including energy, manufacturing, construction, and retail. The backlog stems largely from an outdated industry philosophy toward truck attainment and an American economy that has been wholesome and resilient since the recession ended in 2010.
Trucks and transportation have been the lifeblood of this economic machine. The active economy means that more companies are shipping materials to job sites or goods across the country; more businesses are in need of restocking shelves and inventory; more consumers are ordering goods online (that need to be shipped); and as a result, trucks are working strenuously.
Class-8 truck orders and sales continued at a healthy pace through much of 2018, as many companies saw the need to upgrade into newer equipment or expand their fleets to handle increased demand. According to ACT Research, Class-8 net orders amounted to 506,300 units at the end of November, the second-strongest 12-month order period in history behind the 12-month period ending in October.
Monthly orders (28,082) still outperform the number of units being manufactured (27,973) as of November, and while the breach is narrowing it continues to show astronomical demand for new trucks.
Truck obtainment and replacement strategies that help the economy stay active need to be carefully deliberated as we continue into 2019 and companies take a closer look at their bottom lines.
The long-standing business objective was for organizations to make hefty purchase orders of trucks and then drive them for anywhere between five to upwards of ten years of service as a way to squeeze every cent out of the truck’s usage. However, data and analytics are proving this model to be costly and unproductive. Instead, private fleets and for-hire carriers are realizing they can achieve more savings on the truck’s overall impact to the bottom line, as well as maintenance and repair (M&R) — the highest inconsistent and volatile cost of a fleet operation — by moving to a shorter lifecycle.
When energy companies drive their trucks as long as possible, they are running on functional obsolescence — making decisions based on the truck’s ability to stay on the road. In most cases, when companies let the truck decide the timetable for replacement, they are left struggling to order a new truck based off limited planning cycles. This is fueling today’s backlog of truck orders, as the compounded effect of multiple transportation firms and this ideology have caught up to them. Specifically for gas, oil and energy brands, the effects of an order backlog will continue to be felt as long as these businesses continue an asset attainment strategy based on functional versus economic obsolescence.
Today’s leading companies are taking a different approach, paying closer attention to a truck’s individual TIPPINGPOINT®, the point at which it costs more to operate a truck than it does to replace it with a newer model. Parameters such as the cost of fuel, utilization, finance costs, and M&R are all factored into a truck’s TIPPINGPOINT®, giving fleet operations, laborers, and finance departments the data and analytics needed to determine and calculate the optimal time to replace an aging truck.
For example, a recent analysis of long-term ownership compared to shorter lifecycle management reveals a significant cost savings over time. A fleet that opted for a four-year lease model on a truck would save almost $27,893 per truck in comparison to a seven-year ownership model based on the aforementioned factors (fuel, utilization, financing, and M&R). The shorter lease model is also cost-effective when compared to just a four-year ownership model, showing average savings of $12,710.
This approach offers the flexibility to adjust to changing markets, ultimately driving down operating costs while reinforcing a positive corporate image, driver recruitment and retention efforts by continually upgrading to newer trucks. Companies are leveraging data analytics and comprehensive fleet studies that can produce a fleet modernization and utilization plan, projecting when aging equipment will need to be replaced. This is especially effective with today’s fluctuating demand and the current booming economy. In contrast, companies trying to acquire equipment solely based on demand are faced with equipment shortages and long lead times.
Just as significant are recent alterations to the corporate tax rate, as well as new accounting standards, that have made it more attractive to lease equipment. With these changes, at least in the case of truck acquisition, purchase of equipment remains more expensive than shorter-term leasing. What’s more, leasing remains the preferred method for companies regardless if they have a stronger or weaker balance sheet. In addition, leasing also allows companies to avoid the risk of residual value and the expense of remarketing.
Companies that consider a flexible lease model to shorten their asset management life cycles will be able to plan their substitutions better and thus avoid the discomfort associated with the current backlog. By adopting this new approach of shorter truck life cycles, industry organizations and transportation companies will become better equipped to exchange their aging truck fleets in a more cost-efficient manner as we continue into 2019. UP
The Author: Brian Holland is president and chief financial officer at Fleet Advantage, a leading innovator in truck fleet business analytics, equipment financing and lifecycle cost management. For more information visit www.fleetadvantage.com.