The Increasing Significance of Making Accurate Contract Decisions for Transportation Fleet Procurement

Asset management is vital to any organization looking to grow its portfolio. No matter the kind of organization, the benefits of asset management are valuable.

Mike Mareen Adobe Stock 381285702 Editorial Use Only
Mike Mareen AdobeStock_381285702_Editorial_Use_Only

Equipment asset awareness has never been more critical, especially in today’s rapidly changing economy. Reviewing contract renewals and equipment replacement cycles is also difficult for many companies, as one study shows that 91% of companies do not have a dashboard that tracks renewal status. This awareness is so important that the business world dedicates an entire month in March, acknowledging the importance of asset awareness.

As such, March serves as a special reminder to businesses that no matter the time of year, it’s essential to understand how improved asset management practices can contribute to their organization’s overall mission and revenue goals. Asset management is vital to any organization looking to grow its portfolio. No matter the kind of organization, the benefits of asset management are valuable:

  • Improved budgeting and planning
  • Increase efficiency
  • Manage equipment and improve maintenance
  • Provide compliance with regulations

Important to scrutinize equipment lease contracts

Asset management is especially critical today because flexibility is at the forefront of every successful business strategy when operating a transportation fleet. Today’s top fleets realize they must scrutinize every detail of each truck’s lease structure since the contract can mean the difference of millions gained or lost toward their bottom line. To help fleet executives maximize their asset management strategies, asset management firms are providing a full suite of data analytics to determine the best finance option for their operation.

Fleet Advantage Contract DecisionsFleet Advantage

These tools are needed to help fleets make better decisions because finance costs are a significant calculation in any equipment acquisition. The most effective process to reduce truck costs and finance costs is to have competitive finance options. For example, competitive options can be achieved when full-service lease agreements are unbundled, allowing the freedom and flexibility to shop for the most competitive options. To determine if unbundling is a good fit for an operation, a UBL/FSL Comparative Cost Analysis should be utilized. In the example below, the calculation captures significant savings in a UBL compared to finance/monthly costs against an FSL ($31,900 per vehicle), even for daycab trucks running roughly 55,000 miles per year. The CPI increases are based on actual history (4.0% Cap). These amounts will differ by cab type, application, utilization, and OEM, but savings versus a traditional FSL will likely be achieved. 

In addition to a lease type analysis, various metrics should be deployed, such as the lease versus purchase analysis, lease vs. loan analysis, sales tax analysis, etc.

Where should fleets begin with their analysis?

Every truck has a different in-service start date and keeping track of all units is cumbersome but imperative. Therefore, in addition to monitoring Total Cost of Ownership (TCO) expenses, organizations must analyze their complete truck life cycle data to determine when trucks are nearing the right time for a replacement starting at 18-20 months before contract expiration.

It is also important not to get locked into a financial structure that does not match the usage of the asset, limiting flexibility to get out when the market changes or when it’s time to pivot.

When reviewing contracts and various in-service dates, important checklist items include:

  • monitoring lease expirations by truck;
  • checking if there is flexibility to exit the lease in 90 days;
  • determining what type of extension provisions are in place;
  • checking if the fleet is locked in a contract with limited options; and
  • evaluating if the fleet can produce a true Cost Per Mile (CPM).

Regardless of what type of lease or financing is being utilized, fleets must determine what is included and conduct a line-by-line comparison for each cost item such as the lease payment, warranty, maintenance, and repair cost (whether in-house or outsourced), licensing, tires and etc.

Around 6-9 months (considering current build slot availability) ahead of the truck’s optimum replacement window is the right time for fleets to determine whether they should plan for a new acquisition type. This should be a part of an organization’s one-, two-, and three-year procurement strategy and holistic asset management approach, which evaluates factors such as corporate structure, balance sheet, interest rates, residual values, tax benefits, depreciation, etc., in making decisions.

Data and resources to ensure asset optimization

Asset management partners help fleets gain an extra competitive edge because they leverage advanced data analytics to perform analytics such as a Comparative Cost Analysis to determine the optimal time to upgrade equipment and even what type of equipment. Furthermore, operating data is used to build customized fleet modernization plans using pioneering tools such as emissions calculators to procure newer trucks that preserve both the bottom line and the environment.

With all the economic changes, corporate transportation fleets must utilize every possible resource to manage their asset portfolios properly. Today’s fleets continue to seek advanced data-driven tools that can help offer insight into their decision making, which is why it’s critical to work with a holistic asset management partner that can help maximize efficiency and reduce cost at every opportunity.

With this approach in mind, fleets will realize how more robust asset management practices will contribute to their organization's overall mission and revenue goals.