By Joel Levitt, Director of International Projects, Life Cycle Engineering You can buy equipment by lowest acquisition cost or lowest total cost over the life of the vehicle. Also referred to as lifecycle cost, this later method considers the point in a vehicle or equipment’s life when the sum of all ownership and operating costs reaches a minimum. In this column, we will consider two of the ways in which to evaluate lifecycle costs. These two methods are different only in the way they handle the time value of money. The simpler lifecycle cost analysis disregards the time value of money and just looks at the estimates of total costs, regardless of when they are incurred. The other method looks at the cost per useful activity, such as cost per ton or cost per ton-mile. This is done by dividing lifecycle cost by either lifetime mileage or life in months or utilization (tons) to get the most accurate gauge of vehicle cost. Why do this? The denominator is essential to show the total costs for delivered products – for example, the cost of the vehicle per ton-mile. Without knowing the extra life of the unit – expressed in months, miles, hours or ton-miles – cheaper, short-lived units always will look better then more expensive, long-lived units. If the life of the unit is unimportant – such as when you need units to cover a three-year contract and then plan to discard them – then the cheaper unit might be the best business decision. The issue is usually that most of the costs are estimates based on history, or they are guesses which may not be based on anything. In some ways, doing a lifecycle cost analysis is an economic model of how one truck will do versus another. Key Focus Areas Vehicle and equipment costs are typically accumulated in the following five areas. Ownership Costs • Purchase costs, depreciation, cost of money. • Lease/rental payments (the fixed portion). • Insurance costs, self-insurance reserves. • Permit, license costs, statutory costs (costs mandated by laws). • Make-ready costs, new/used vehicle preparation. • Actual cost of searching/shopping for vehicles. • Rebuild/remanufacture costs. • Labor to strip parts off retiring units. • Net out any resale value of the vehicle or useable parts at the end of the period. Operation Costs • Fuel. • Fuel taxes (above those paid at the pump). • Mileage charges on rental/leased units. • Tire consumption (not repairs). • Oil, antifreeze, hydraulic oil. • Miscellaneous operating costs. Maintenance Costs • True cost of inside labor (includes fringe benefits, lost time, overhead). • True cost of inside parts (includes cost to carry, spoilage, etc.). • Outside labor (vendors). • Outside parts (suppliers). • Oil/antifreeze changes. • Road call – accident. • Road call – fuel. • Road call – mechanical breakdown. • Road call – tires. • Miscellaneous. • Hidden costs of failures. Allocation of Overhead Costs • Cost of maintenance facilities. • Cost of utilities (heat, light, power, phone). • All persons in maintenance department not reported on repair orders. • Supplies not charged to repair orders. • Tools and tool replacement. • Repair and upkeep of maintenance facilities, tools, shop equipment. • Computer systems (all expenses). Downtime Costs • Revenue loss. • Idle operator/driver salary. • Replacement unit rental costs. • Load replacement cost for ruined product (for time-sensitive loads like vegetables). • Late penalties. • Intangible costs of customer dissatisfaction, hidden costs, other costs. • Cost of tied up capital. Calculations Here are the formulas to figure the lifecycle cost without the time value of money: Total lifecycle cost (TLCC) = ownership costs + operation costs + maintenance costs + allocation of overhead costs + downtime costs - salvage value at end of life. Lifecycle cost (LCC) per mile = TLCC ÷ estimated hours of life as measured by hour meter or miles. LCC per ton of freight = TLCC ÷ total tons per life of the asset. LCC per month = TLCC ÷ months of expected unit life. If you want to include the time value of money, stage the expenses when they happen – like acquisition on day one – and use standard Net Present Value (NPV) formulas to bring the numbers to today, then divide by the denominator. Questions to Consider Keep in mind that the estimates you use for calculating lifecycle costs will impact the results. For example, high guesses for utilization (tons, mileage or hours) will skew the results to look better for low operating cost units. Low utilization guesses will distort away from high fixed cost units. High interest rates will favor units requiring lower initial investment, though they might incur higher operating and maintenance costs over their lifecycles. Guesses of diesel, oil, tire and antifreeze prices years into the future also will impact which trucks you choose. Also, note that costs of spare parts has increased faster than inflation for the last decade or so. Lifecycle costs should drive the vehicle replacement decision. When the monthly lifecycle costs of an old vehicle exceed the monthly cost of a new vehicle, the old vehicle should be replaced. Joel Levitt is director of international projects for Life Cycle Engineering (www.lce.com), an organization that provides consulting, engineering, applied technology and education solutions that deliver lasting results. Previously, he was president of Springfield Resources (www.maintenancetraining. com), a management consulting firm. How do you judge true vehicle costs? Total cost over lifetime analysis An analysis of lifecycle costs can help determine the point at which it is more cost efficient to replace vehicles and equipment rather than to repair them. Photo courtesy of Erica Schueller, Editor PTEN magazine COSTS are often guesses which may not be based on anything. | Management 34 FLEET MAINTENANCE ❚ APRIL 2016 ❚ VehicleServicePros.com
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