Achieving cost savings through lift truck fleet management

How much does the lift truck operation cost a company? If the first answer that comes to mind is equipment cost, you are in the majority because that is the initial reaction of most people when they consider how much was paid for their lift trucks. Companies do not always take into account the cost of operating, servicing, and administering the lift truck fleet.

07/15/2002


Key concepts

Equipment acquisition and service account for only 10% of the total cost.

A growing trend is to outsource the material handling portion of the business.

Consider acquisition, use, administration, and hidden costs when evaluating fleet management expenses.

Sections:
Outsourcing: A growing trend
Establishing a baseline
Putting it together
Implementation obstacles
Summary

Sidebars:
Is outsourcing for you?
Advantages of total fleet management


How much does the lift truck operation cost a company? If the first answer that comes to mind is equipment cost, you are in the majority because that is the initial reaction of most people when they consider how much was paid for their lift trucks. Companies do not always take into account the cost of operating, servicing, and administering the lift truck fleet.

In reality, for most operations the cost of acquiring equipment is minimal compared to the other expenses associated with maintenance, use, and administration. For an average company, 4% of the total material handling cost is attributed to the acquisition of equipment, and another 6% to service, or just 10% of the total expense.

While aggressive purchasing programs do save companies money in acquisition and servicing, the remaining process costs — a whopping 90% — provide opportunities for enormous breakthrough savings.

Outsourcing: A growing trend

As companies in all industries streamline operations to remain competitive, a growing trend is to outsource the material handling portion of the business. The rationale is to keep the company focused on its core business. In other words, let the material handling experts do what they are good at — managing that process.

Material handling outsourcing companies offer different levels of service, with various cost savings the result. When outsourcing is limited to assistance in acquiring new equipment, minimal cost savings result because this approach only addresses 4% of the total expense. When both acquisition and service are outsourced, significantly more savings are realized because 10% of the total cost base is being rationalized.


Operator training is one of the many services that total fleet management companies provide.

The most cost-efficient outsourcing is total fleet management. With this approach a material handling expert completely takes over that part of the company's operation. This task includes developing specifications for equipment based on a thorough understanding of the company's operation, providing financing and acquisition services, maintaining the equipment, training operators, supplying rental trucks to meet peak period needs, offering itemized single monthly invoicing, and recommending timing of fleet replacement to optimize investment.

Based on the numerous advantages, why don't more companies take advantage of the substantial savings that result from total fleet management?

One important reason is that they do not understand how much could be saved. Often companies do not consider all the costs that drive the material handling operation.

Establishing a baseline

The key to evaluating total fleet management cost savings is to begin with an accurate baseline expense and to measure potential savings against it. The main components of a baseline cost analysis are acquisition, use (including truck operation, service, and parts), and administration. There are also hidden costs that should be considered on a case-by-case basis.

Acquisition. The cost of acquiring a lift truck fleet begins with the purchase price. Depreciation and interest must also be considered. In addition, the loss of potential investment income — revenue that could have been generated by investing money that would be used to buy lift trucks — should be included in the calculation of the baseline cost.

An expert evaluation of the operation can result in substantial saving when acquiring new or replacement equipment. Fleets analyzed by professionals may contain 20% more trucks than necessary, which is an expense easily eliminated with the proper mix of equipment to fit the application.

Use. The expense of using a lift truck fleet is greatly influenced by the costs associated with its operation — servicing the truck, replacement parts, fuel, management, and operators.

The cost of use includes expenses associated with servicing the equipment — technician wages, benefits, and training, as well as salary and benefits for the service supervisor who oversees the work. Service costs also include major repairs, rental of equipment to replace trucks being fixed, and cost of space to house the service facility.

Parts are an additional cost associated with the use of the lift truck fleet. Cost of parts, inventory personnel, storage and ordering, inventory shrinkage, and space to house the inventory must be taken into account. The average cost of carrying inventory ranges from 15% to 20% of inventory dollars.

The most overlooked cost of material handling — truck operation — is also the largest cost pool. Truck operation includes operator wages, benefits, and training, as well as supervisor salary and benefits, avoidable equipment damage, product damage, and fuel costs.

Other key drivers to the cost figure are the number, type, and age of units in the fleet. If the mix is not optimal, asset investment, productivity, and downtime become significant costs to the operation.

Administration. Overhead costs are difficult to identify in a material handling operation. Considerations include capital appropriations cost, human resource and MIS expense, and purchase order payment and processing.

On average, 47 hr are spent to develop and approve a capital appropriation request — at an estimated cost close to $1500/request. Further, the average cost to process purchase orders and payables ranges from $60 to $90/transaction.

Many companies are uncertain of their cost base, so they ignore the soft expenses. It is fine to estimate the costs if you do not know the exact numbers; something is better than nothing. As the cost of handling transactions is quantified, benefits of a single supplier start to become clear.

Hidden costs. There are several hidden costs that may be unnecessarily increasing the company's material handling operations. The costs of acquisitions — time researching vendors, equipment demonstrations, obtaining quotes on parts and service, etc. — are often overlooked when calculating the baseline figure. Lost productivity due to excessive downtime of old equipment and line down costs due to unplanned downtime should also be considered.

Putting it together

Once the individual pieces of information necessary to establish the baseline costs are accumulated, it is time to put it all together. By combining the investment (value of the fleet, parts inventory, and space) with the operating costs (cost per model, interest, purchasing, accounting, MIS, and management activity), the company gets a comprehensive picture of the true cost of the material handling operation — the baseline cost.

The baseline cost is the figure used to compare outsourcing proposals. It is difficult to compare outsourcing proposals to each other on an apples-to-apples basis. Each outsourcer may have a different approach based on their level of expertise and creativity.

Instead of apples-to-apples, look at the components of each plan and determine which one

best meets your current and long-term needs. Also consider which outsourcer understands your business and will make the best long-term partner.

Implementation obstacles

Outsourcing the material handling operation through total fleet management requires changes to a company's internal systems that may not be readily accepted. To be successful, the decision to implement a total fleet management program requires upper management support, as well as team involvement to create broad-based acceptance.

Other obstacles to implementation include a perceived loss of control by management, union issues, and an inability to quantify some material handling costs. Even when savings are documented, at least 50% of outsourcing initiatives do not get implemented because of internal issues. Do not underestimate the resistance to change.

Summary

When successfully implemented, outsourcing fleet management can reduce a company's fleet expenses by 15 to 25 percent the first year. And the good news is that these cost savings are not a one-time solution. With the right provider, fleet management is a long-term relationship that delivers continuous improvement year after year.



Is outsourcing for you?

There are several questions to answer when considering the outsourcing of the lift truck fleet.

Is the potential outsourced operation not a core competency for your business?

Is there a provider willing to supply the operation the company is looking to outsource?

Does the company perform this operation at less than a world-class level?

Does the plan have senior management support?

If the answer is "yes" to these four questions, outsourcing is a viable option for the company. If one of more questions receive a "no," look further before deciding to pursue this option.

Advantages of total fleet management

Adapting the total fleet management business approach returns several significant benefits to the company, including the partial or complete elimination of the parts department, parts inventory, and service department.

In addition, the fleet management company provides:

Analysis of the operation to eliminate excess equipment and related costs

Expert analysis to pinpoint the optimal time to replace equipment

Financing tailored to meet the latest regulations

Service of lift truck fleet by trained mechanics performing to standardized rates

Replacement parts that meet OEM standards

Rental to meet peak period needs

Consolidated billing to eliminate transactions and paperwork.



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