When faced with a spreadsheet of vehicle-related costs it can be difficult to make sense of the figures, particularly when presented with increased spend in multiple areas. That’s why, for fleet managers, Total Cost of Ownership (TCO) is one of the key metrics you need to understand.
This vital statistic takes into account all costs related to owning and operating a vehicle across its entire lifespan. More than just the purchase price, it includes everything from fuel and maintenance costs, to insurance fees and even depreciation, providing a holistic overview of your fleet’s operational expenses.
For fleet-based businesses, this can be used to improve fleet efficiency, compare vehicle cost of ownership, and highlight cost saving opportunities. Beyond strategic planning, optimizing your TCO can also provide crucial feedback to enhance overall profitability, set specific fleet objectives, and even improve sustainability.
Beyond reducing up front fleet costs, optimizing your TCO can facilitate changes to your fleet’s core structure that yield long-term savings as well as environmental benefits.
what is total cost of ownership?
Fleet costs are made up of several factors. Total Cost of Ownership takes all these factors into account to deliver a complete financial assessment of owning and operating a vehicle (or indeed a fleet of vehicles), over their entire lifecycle.
Of course, the most obvious cost is the initial purchase price offset against any return when the vehicle is sold. Over and above that, however, TCO also includes all the other costs – both direct and indirect – incurred between the purchase and sale of the vehicle.
Direct costs will be fairly visible and easily quantified such as fuel, insurance, and repairs or replacement parts. Indirect costs, however, are harder to calculate, but can mount up nonetheless. They include factors such as the cost of labor, daily usage, and routes, the follow on costs associated with any downtime, plus fees, taxes or parking costs.
what are the key components of fleet TCO?
Understanding the key components of Total Cost of Ownership allows you to implement strategies for more efficient fleet management. These core components include:
purchase price & financing
Fleet managers have various options when acquiring vehicles, purchasing either with cash, or via a loan or lease. Cash will have an opportunity cost in terms of lost interest, while loans or leases will have a funding or borrowing cost.
As highlighted in a recent KPMG study, when evaluating the lease-versus-own proposition, it’s important to consider current trends such as escalating purchase prices as well as higher interest rates that make borrowing more expensive. Budget levers such as economies of scale and availability of in-house maintenance can also impact cost per mile, but in any case, fleet owners will need to be meticulous when calculating costs in their fleet TCO to arrive at a cost-effective decision.
fuel costs
Whether your fleet comprises electric vehicles, hybrids, or internal combustion engine (ICE) vehicles, fuel and energy use will be a big budget item, potentially accounting for up to 30% of a fleet’s overall TCO.
Costs can vary depending on the fuel type – not to mention fluctuating fuel and energy prices – but consumption can also be impacted by factors such as fuel efficiency, driver behavior, unoptimized routes, and even tire choice.
maintenance & repairs
Vehicles need maintenance throughout their lifespan. This will vary according to vehicle usage and manufacturer service schedules, and can also increase with the age of the vehicle.
Planned maintenance is key. Unplanned work can drive up expense through:
- on the Road repairs through an outside vendor
- towing costs
- waiting on Parts
- technician Overtime
- log Jam of work
- disruption to Service Level for the Operation
When calculating costs you will need to account for both routine maintenance such as servicing and oil changes and unexpected repairs such as engine problems or chipped windscreen replacement. This type of issue can significantly impact TCO if the repair requires costly components or extended downtime. Remember to account for both parts and the cost of labor when calculating actual and forecast maintenance and repair costs.
insurance & compliance costs
Vehicle insurance should be added as part of your TCO calculations bearing in mind that the cost of your policy may vary depending on the type of vehicle, coverage level, or driver history. Alternatively, you might have a group policy so you can treat this as a fixed expense.
Compliance costs such as those related to safety regulations and emissions standards also contribute to overall expenses. Factor in costs associated with vehicle inspections and safety training as well as any measures you might need to take to meet environmental regulations.
depreciation & resale value
Vehicle depreciation is a vital part of your fleet TCO calculations with all vehicles decreasing in value over time thanks to wear and tear. In order to minimize your depreciation costs, you’ll want to achieve both the lowest capital cost and the highest resale value. Ensuring your vehicles retain the best used value through vehicle choice and regular maintenance is key to optimizing depreciation.
taxes & other fees
Vehicles are subject to various different taxes, which can vary according to the vehicle type and funding. Remember to include vehicle registration fees, vehicle excise duty and any fuel taxes. The latter can be particularly significant when reviewing electric vehicles as there are many incentives, both from a corporate and personal tax perspective, to consider.
how to calculate your TCO
Once you have a full and detailed list of costs, it’s time to start crunching numbers. You’ll need to estimate the expected lifespan of the vehicles in your fleet, and if you own the vehicle and intend to sell it on, work out an estimate of the anticipated resale value. Finally add all the costs for each category over the full lifespan and subtract the resale income. This is the Total Cost of Ownership.
why optimize fleet TCO?
When contending with rising costs in several areas, fleet managers ignore Total Cost of Ownership at their peril. Not only does optimization enable you to make more informed purchasing decisions and provide greater accuracy in financial reporting, but when calculated correctly, TCO also offers an opportunity to increase profitability.
For example, with TCO fleet management data at your fingertips, you can reduce overall fleet expenses without impacting performance. Analyzing the data can help you spot how to improve operational efficiency, or increase driver productivity. Alternatively, it can suggest cost-saving opportunities or ways to enhance the vehicle lifespan and resale value.
Finally, in addition to optimizing fleet costs and processes, focusing on TCO can even help you define your core fleet strategy. So, whether you want to focus on increasing driver safety, reducing costs or tackling CO2 emissions, optimizing your TCO can help you achieve and sustain successful sustainability goals.
strategies to optimize TCO
The following strategies can help you optimize TCO by improving fleet efficiency and reducing fleet-related costs.
invest in fleet management software
One of the primary ways to take control of your TCO is to implement fleet management software. Not only can this simplify TCO calculation, it also helps capture detailed information about all aspects of your fleet, helping you understand the impact of any potential changes on TCO.
AMCS Fleet Maintenance software, for example, gives you comprehensive oversight of your fleet assets. It allows you to plan vehicle maintenance, parts, repairs and warranties, to monitor the health of your vehicles so you can unlock greater productivity and get ahead of cost creep. For the best results, build your data set from the shop floor up, using standardized work practices and on the job mobile data entry to see how small adjustments to maintenance workflows can reduce Total Cost of Ownership.
improve fuel efficiency
Fuel costs significantly impact Total Cost of Ownership, representing a major variable expense incurred during fleet management. You can improve fuel efficiency by keeping an asset well maintained, selecting more fuel efficient vehicles, optimizing routes, or changing driver behaviors. With connected car data, fleet managers can even monitor fuel consumption in real-time or track usage patterns to identify anomalies or inefficiencies.
Research continues into the Total Cost of Ownership for zero emission powertrain solutions in the heavy goods sector, however, it may be that switching to alternative fuels like electricity can reduce your TCO. Focus on detailed TCO analysis to discover whether fuel savings will outweigh the higher upfront cost of EVs.
implement preventive maintenance
You can extend the life of your fleet with a preventive maintenance program which helps you avoid costly emergency repairs and maintain peak operational efficiency. With AMCS Preventive Maintenance software, you can schedule preventive maintenance work based on distance run, hours operated, fuel consumed, or any other metric you choose. You can even use the software to show you the Total Cost of Ownership for each asset broken down to cost per mile, or cost per hour.
In fact, the AMCS Fleet Maintenance Solution can help you to move toward making scheduled shop work 80% of all the work your shop performs, significantly reducing your fleet TCO by minimizing unplanned repairs and downtime.
enhance driver behavior through training
Even small changes to driver behavior can enhance safety and save on fuel, providing another way to reduce your TCO. According to the U.S. Department of Energy, rapid acceleration and heavy braking can increase fuel consumption by 33% in highway driving, and 5% in the city. Reducing idling can also provide further fuel savings.
In order to identify such behaviors you may need to install in-car telematics. This technology can help you spot detrimental driving habits including inconsistent speed and unsafe cornering. Once you know that these things are occurring, you can design relevant training to eliminate the problem and increase efficiency.
optimize route planning
Route optimization significantly impacts your Total Cost of Ownership by reducing expenses related to both fuel and driver time. By finding the most efficient routes and scheduling stops wisely, route optimization software, such as that offered by AMCS, can minimize travel distances and reduce fuel consumption.
Opting for a GPS enabled solution gives the added benefit of dynamic routing, allowing you to provide real-time instructions to your drivers to help them avoid traffic jams and select a more efficient route. That way you won’t waste time idling or driving further than necessary, all of which can increase your cost per mile.
conclusion
Arduous as it might seem to collate detailed data from across your business, understanding and monitoring your fleet TCO is a must. Without it, fleet managers are working in the dark when it comes to reducing or comparing vehicle cost of ownership or implementing cost-saving strategies.
So, whether you want to optimize asset utilization or plan ahead for future investments, TCO is a key tool to help you improve operational efficiency and enhance the sustainability of your business.
Technology-driven solutions such as those delivered by AMCS make optimizing your fleet TCO simple. Contact us to find out how we can help.