One of the most common mistakes the average car buyer makes is trying to find a car they can afford to buy. What they should be doing instead is looking for a car they can afford to drive.
What's the difference? And how do fleet managers avoid making the same mistake?
For fleet managers, the price of a car is only one part of the equation. It's the part related to being able to afford to buy the vehicle. But to help them decide which cars to add, drop, or keep in their fleets, they look at all the costs across the entire life of the vehicle.
And to do that, they use total cost of ownership (TCO).
What is total cost of ownership for fleet?
The "total" in total cost of ownership includes:
- Purchase price
- Operating costs
- Maintenance costs
And inside each of those categories, there are smaller but equally important additional costs.
Here, it's all the costs associated with the purchase, which can include what you paid for the car, associated taxes, and warranties. There are also the costs connected to getting everything set up, which can include delivery, installation, and training for your staff. And there's the costs associated with disposal. In some cases, the salvage value might cover disposal costs, but that's not always.
All vehicles require some sort of fuel, and each type of fuel has a different associated cost. Depending on your area, an EV fleet might cost a lot less to charge than one with internal-combustion engines. But there can be price differences here, too. For example, diesel costs more than gasoline. Insurance is another ongoing cost you need to include.
Even with a newer fleet with few maintenance requirements, there are still many types of costs in this category. For example, parts and materials, labor, and losses tied to unscheduled downtime. You also need to think about how these costs could rise as the vehicles move closer to the end of their useful lives.
As a quick side note, one of the proposed benefits of switching to an EV fleet is that even though there are higher upfront costs, fleet managers can save a lot on maintenance, reducing the overall TCO. Remember, compared to an internal-combustion engine, an EV has fewer fluids (think engine oil) and moving parts overall. There's also less wear and tear on the brakes. But fleet managers need to weigh these savings against possible larger one-time repairs like replacing batteries. Disposal costs might also be higher, depending on local regulations.
How can you calculate TCO for fleet?
The most basic formula is to take those three types of costs, purchase, operating, and maintenance, and add them together.
In the end, it's not hard math. But it is critical.
What is utilization and how can you calculate it?
TCO can tell you a lot about your operations, including when to retire a specific vehicle from the fleet. It helps you answer one of the fundamental questions in business: Does it make more sense to repair this asset or replace it?
But you can also use TCO as part of a utilization calculation to find and fix issues that might be hiding in the fleet. Utilization is how much it costs you to own a vehicle either per hour or mile of service.
You take the TCO of an asset and divide by the total run time or total miles.
For example, if the TCO for a car is $50,000 and you drive 100,000 miles, the total cost per mile is $0.5.
Once you know the TCO and utilization for different vehicles in your fleet, you can start to look for outliers. If most cars in the fleet cost you $1 a mile, you'd want to look closely at the one that costs you $2. Is there something about the maintenance that's driving up the costs?
How does an EAM help with TCO?
If you want to calculate an asset's TCO and utilization, you need a lot of accurate data, which is nearly impossible to get with older manual methods of data capture. When all your work orders, for example, are paper or spreadsheet based, there are too many opportunities for human error; you can't trust your numbers. And even if you could, the process of collecting all the required data and then crunching it into actionable insights is a time- and resource-intensive exercise in frustration.
Modern enterprise asset management software can help you at every step. First, it acts as a single source of truth for all your purchasing costs data. Then, it allows you to automate data capture, removing the human, error-prone element. From there, you can use the software to run robust reports that show you exactly how much assets are costing you to keep on the road.
Learn everything you need to know about total cost by downloading our free e-book.
Purchase price is just one piece of the puzzle when it comes to understanding the role an asset plays in your fleet. To more clearly understand an asset's cost, you need total cost of ownership (TCO), which includes purchase price, operating costs, as well as maintenance costs. Purchase price must include all associated costs; for example: delivery, installation, staff training, and warranties. Operating costs can include fuel, while maintenance costs are all the parts, materials, and labor. Once you have the TCO, you can also calculate utilization, which is how much an asset costs you either for hour or operation or mile travelled. With this new calculation, you can start to look for outliers in the fleet. So, why does this vehicle cost you $1 per mile but that one costs you $2? Did you pay too much up front? Are there maintenance inefficiencies you need to investigate? With TCO and utilization, you can start to better understand how you're spending money, which is the first critical step in spending less.
About the author
Jonathan has been covering asset management, maintenance software, and SaaS solutions since joining Hippo CMMS. Prior to that, he wrote for textbooks and video games.